403(b) Plan Audit Requirements
Today s Presenter Diane M. Wasser, CPA Partner Partner-In-Charge, Pension Services Group Amper, Politziner & Mattia, LLP
Diane M. Wasser Partner-In-Charge, Pension Services Group Amper, Politziner & Mattia, LLP Diane is a Partner at Amper, Politziner & Mattia, a regional accounting, auditing and consulting firm on the east coast. Diane heads up the firm s employee benefit plan audit practice where she oversees audits of defined contribution, defined benefit and welfare benefit plans. Diane is a member of the AICPA s 403(b) Task Force, graduated from Miami University, is a CPA, holds a Series 7 designation and was named one of the Top 50 Businesswomen in NJ in 2009. Contact Information Telephone: 908-218-5002 Email: wasser@amper.com
403(b) Plan Audit Requirements The information contained herein and presented is not intended to constitute the rendering of legal, tax, investment, or accounting advice. Application to specific circumstances should rely on further professional guidance.
403(b) Plan Audit Requirements Final Regulations Field Assistance Bulletin No. 2009-02 transition relief Historically, 403(b) plans have had a hands-off management approach with little employer involvement and major vendor participation. In many cases, this management style may have caused little or no monitoring of plan operations and investment options, this heightens the importance of fiduciary obligations.
403(b) Plan Audit Requirements Currently ERISA 403(b) plans have simple 5500 reporting requirements, usually, its just one page. Under the new regulations, all ERISA plans will require the same extensive reporting and independent audit requirements that apply to corporate 401(k) plans. This includes complete financial information.
403(b) Plan Audit Requirements Do not underestimate the time and effort required to accurately prepare a complete Form 5500. Numerous records will be required to complete the task and all vendors involved in your 403(b) plan will need to submit information.
Details: 403(b) Plan Audit Requirements Form 5500 filings are required for all 403(b) Plans covered by Title I of ERISA Even Plans with less than 100 participants must file Form 5500 and provide financial information, at the Plan level, never provided before
403(b) Plan Audit Requirements For all ERISA 403(b) plans, there are two 5500 Form options: The 5500SF (Short Form) This form is for plans that have less than 100 participants. The financial information is summarized and an audit is not required. The 5500 This form is for plans that have 100 or more participants at the beginning of a plan year, The financial information is more detailed and an audit is required. Initially estimated at 7,000 403(b) audits, 9,000 small plans with additional financial information to report
403(b) Plan Audit Requirements Audits are generally required for Plans with: An excess of 100 eligible participants at the beginning of a plan year 1/1/09 (December year end) 7/1/09 (June year end)
403(b) Plan Audit Requirements Eligible participants An eligible participant is defined as: Employees participating in the plan Employees who are eligible for the plan but decline participation Former employees/beneficiaries who have a balance remaining in the plan Eligible includes all employees under the Universal Availability rule and all former participants with account balances
403(b) Plan Audit Requirements 80-120 rule If a plan has between 80 and 120 participants at the beginning of the plan year, the plan can file as it filed the previous year (i.e. as a small plan not requiring an audit) The DOL has stated that the 80-120 rule can be applied at the beginning of the 2009 plan year
403(b) Plan Audit Requirements 403(b) Plan unique circumstances pose unique issues when gathering necessary information to prepare financial statements and obtain sufficient supporting documentation Although the audit is for 2009 the 2008 and prior years information is needed for the 2009 opening balances 403(b) plans did not historically have strict reporting guidelines forcing documentation at the Plan level Historically treated as a collection of individual contracts
403(b) Plan Audit Requirements Employees could engage in a range of actions without the involvement of the employer Concern exists about the plan sponsors ability to cost effectively obtain the necessary financial information for pre-2009 contracts and custodial accounts to which the employer is no longer making employer contributions or forwarding employee salary reduction contributions
403(b) Plan Audit Requirements ERISA requires plan administrators to retain records that: Support information included in the reports and disclosures for SIX years from the date the annual reports were filed (ERISA Sec. 107) and Are sufficient to determine the benefits due or which may become due (ERISA Sec. 209)
403(b) Plan Audit Requirements Counting participants and gathering prior data: Field Assistance Bulletin No. 2009-02 issued by the DOL provided some assistance Field Assistance Bulletin No. 2009-02, dated July 20, 2009 Issued as guidance for DOL enforcement teams Misunderstood by many Does not establish GAAP (Generally Accepted Accounting Principles)
403(b) Plan Audit Requirements Field Assistance Bulletin No. 2009-02 (FAB) essentially offers transition relief to plan sponsors who make a good faith effort to obtain data for pre 2009 contracts and cannot obtain the information Specifically, the administrator of a 403(b) plan does not need to treat annuity contracts and custodial accounts as part of the employer s Title I plan or as plan assets for purposes of ERISA s annual reporting requirements provided that:
403(b) Plan Audit Requirements 1. the contract or account was issued to a current or former employee before 1/1/09 2. the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before 1/1/09 3. all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer AND 4. the individual owner of the contract is fully vested in the contract or account
403(b) Plan Audit Requirements The FAB provides relief in that current or former employees with only contracts or accounts that are excludable from the plan s Form 5500 or Form 5500- SF under the transition relief do not need to be counted as participants covered under the plan for Form 5500 annual reporting purposes, therefore, those participants do not need to be counted for purposes of the 100 at the beginning of the year
403(b) Plan Audit Requirements The FAB also provides relief in that audit opinions citing a qualification, disclaimer or adverse opinion expressly stating that the sole reason for such an opinion is because such pre-2009 contracts were not covered by the audit or included in the plan s financial statements will not be rejected by the DOL BUT!
BUT! 403(b) Plan Audit Requirements None of this changes Generally Accepted Accounting Principles None of this makes a plan sponsor s fiduciary responsibilities disappear None of this relieves a plan sponsor of ERISA s requirements to retain adequate plan records IF the records are available after a good faith effort, they must be included in the Form 5500 and financial statements and thus subject to audit (if you have them you have to count them!)
WHAT IS THE OBJECTIVE OF THE AUDIT? To express an opinion on whether the plan s financial statements are presented fairly, in all material respects, and in conformity with U.S. generally accepted accounting principles The auditor is responsible to plan and perform the audit to obtain reasonable assurance that material misstatements are detected Reasonable assurance is high, but not absolute The audit is conducted in accordance with auditing standards generally accepted in the US
WHAT IS THE OBJECTIVE OF THE AUDIT? Includes: gathering information to understand the Plan and its internal control environment understanding the design and implementation of internal control detailed testing of a Plan s accounts and transactions gathering sufficient audit evidence documentation The financial statements are the responsibility of Plan Management, the opinion is the auditors
WHAT IS AUDITED? Investments Participants Opening balance Eligibility Contributions Distributions Transfers in and out Earnings allocations Fund allocations Vesting Ending balance Timeliness of Contributions Prohibited transactions
WHAT IS AUDITED? Investments Limited Scope or Full Scope Audit Limited Scope assets are held by a bank, insurance company or trust company, and are certified as to completeness and accuracy Custodians certify the information as contained in their ordinary books and records Custodians generally provide values based on best information available Auditor has no responsibility to test investments, investment activity and related transactions
WHAT IS AUDITED? Full scope - Audit investments, investment activity and related transactions Confirm existence and ownership, assure no liens, no pledges or other security interests Reasonably conclude investment transactions are recorded and investments are valued in conformity with GAAP Disclosures are proper
WHAT IS AUDITED? Detailed Participant Records Auditors are required to perform procedures at the participant level. Plan sponsors will need to ensure records are available by participant. This could be a significant request, especially if each individual is given his/her own account number and they are not linked together by sponsoring organization. Also note, you will need to provide information for participants regardless of their current employment status with your organization.
WHAT IS AUDITED? Detailed Participant Records Previously, sponsors of a 403(b) plan had minimal involvement in the plan, as virtually all plan recordkeeping was outsourced. The plan sponsors typically withhold participant contributions and remit them to appropriate vendor. Now that the plans will be audited, it is expected for the plan sponsor to have control over the plan (even if certain functions are outsourced) and the auditors will need to understand these controls. Early consideration of the significant accounting procedures and internal controls could help make the audit more efficient.
Timeliness: WHAT IS AUDITED? DOL regulations provide that participants contributions to ERISA plans that are paid to or withheld by an employer become plan assets as of the earliest date on which they can reasonably be segregated from the employer's general assets. In 1996 amendments to the regulations, the DOL shortened the outside time limit for contributing these amounts to plans (e.g., 401(k) plans, 403(b) plans subject to ERISA) from no later than 90 days after the beginning of the month following the month in which the contributions are withheld to no later than 15 days after the beginning of such month. Timeliness of deposits has historically been a frequent DOL audit issue
Timeliness: WHAT IS AUDITED? The employer must deposit the employee contributions in a timely manner. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company s assets. The no later than the 15th business day of the month following the payday rule is difficult to defend and is not a safe harbor. If employers can reasonably make the deposits sooner, they need to do so.
FIRST YEAR CONSIDERATIONS DOL requires comparative statements of net assets available for benefits Will need 12/31/08 or 6/30/09 statement of net assets available for benefits, at a minimum, compiled A compilation is less than an audit and a compilation report will be rendered Must determine that the accounting principles used by the Plan in the current and preceding year are consistent Must address the opening balances at the participant level Availability of SAS 70 s must be addressed
FIRST YEAR CONSIDERATIONS Address completeness and accuracy of participant data & records Address eligibility, types of benefits, participant account balances Opening balances at the participant level Essentially must address multiple prior years activity Contributions Distributions Other plan activity Going back in time presents a unique difficulty for 403(b) Plans given the possible recordkeeping shortfalls
FIRST YEAR CONSIDERATIONS Timing 5500 is due 7 months after the plan s year end Extension available for 2-1/2 months Generally information is available within 2 months of year end A 401(K) audit from start to finish can take 1-2 months with fieldwork generally one week or less 403(b) timing and fieldwork could be double, given the initial time through
FIRST YEAR CONSIDERATIONS Agreed-upon procedures Report prepared in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants Procedures are outlined by the specified users of the report Procedures are outlined in an engagement letter Report outlines the procedures and the results
FIRST YEAR CONSIDERATIONS The agreed-upon procedures approach may still be beneficial for 403(b) Plan Sponsors for years prior to the 2009 Plan Year end Organize vendors Determine available records and quality thereof
WHAT TO EXPECT FROM THE AUDITOR List of schedules and documents required Inquiries Understanding of Internal Controls Risk Assessment Requests for documentation of participant level information Experience Knowledge of plan terminology Clear line of communication Helpful recommendations!
WHAT THE AUDITOR IS EXPECTING OF YOU Time Good faith efforts Documentation requested Full analysis of vendors Full analysis of participant population Coordination of communication with third party providers/vendors Financial statements
FIDUCIARY RESPONSIBILITIES The final regulations, by default, impose greater fiduciary responsibilities with respect to 403(b) programs covered by ERISA. Generally fiduciary standards include: Acting solely in the interest of participants Following the plan document Paying only reasonable expenses Diversifying investments Carrying out duties prudently (prudence requires expertise and process)
FIDUCIARY RESPONSIBILITIES Critical to employ fiduciary best practices, somewhat lacking in the 403(b) plan area Plan Committees Meet regularly Keep written minutes Document fiduciary due diligence Investment Policy Statements ERISA attorney relationships Monitor service providers and fees Employ effective internal controls
TO DO LIST Form a Committee Appoint a champion of the annual reporting process Gather complete and accurate information from all vendors, for all years Former employees and former vendors Orphan contracts and missing participants Effectuate information sharing agreements Prepare a trial balance for each plan
TO DO LIST Carefully document the data collection process, this is essential Hire necessary service providers (auditors, record keeper/form 5500 preparer, attorneys, investment advisor) Focus on internal controls
INTERNAL CONTROLS Establish proper internal controls over the plan s financial reporting process. Establish policies and processes to ensure proper authorization and recordkeeping of plan transactions, including investments, contributions, benefit payments, participant data and administrative expenses. This includes controls at all service providers used by the plan, and ongoing monitoring of those controls. Effective controls reduce the risk of asset loss, and help ensure that plan information is complete and accurate, financial statements are reliable, and laws and regulations are complied with.
403(b) Plan Audit Requirements In summary Don t delay!
Questions??
Thank You! The material contained in this presentation is for general information and should not be acted upon without prior professional consultation.