Large Plan and independent audit

[Guest mparker2028]

Client has 401k Plan with 3% Safe Harbor and does max PS every year.

Client is unhappy with the cost of administration because independent audit is expensive.

Is there any way to get around audit reqs, such as breaking plan into 2 or 3 separate plans with same exact benefit structure in each plan?

[Guest b2kates]

short answer, no. Cost of having a plan.

[Guest Boilerburm]

Brett - I would like to know why you dismiss the option of multiple plans so quickly.

We have discussed this creative design in my office, and haven't been able to find a reason why it wouldn't work. Plan 1 could cover 5 job classifications and cover 75 people, while Plan 2 covers the remaining job classifications and covers 90 people. Plan provisions are otherwise identical. I would be very interested to hear arguments on why this would not work.

[Kirk Maldonado]

Boilerburm:

Have you considered whether DOL Opinion Letter 79-87A would affect your analysis?

[david rigby]

... independent audit is expensive.

Fees are negotiable.

[Guest Pensions in Paradise]

I agree with Boilerburm. There is nothing in the regs which require you to aggregate separate plans to determine the number of participants for audit purposes. As to DOL Opinion Letter 79-87A cited by Kirk, I don't believe that applies to this situation. The opinion letter concerned one plan which was sponsored by five related companies, and the companies wanted to treat the one plan as five separate plans for purposes of determining if an audit was required.

In the proposed scenario, the company would adopt two (or three) completely separate plans which would cover different groups of employees.

Can anyone provide a cite which prohibits this type of arrangement?

[Guest LVanSteeter]

Quick question and possible help:

Who is the trustee and is the plan doing a full scope audit?

If the trustee can issue a certification statement, then a limited scope audit can be done. Limited scope audits are much, much less expensive and time consuming than full scope.

Something to look into. . .

[E as in ERISA]

Just remember that they will have two or three of everything else: 2-3 5500s, 2-3 plans to amend (which is becoming almost yearly); 2-3 SPDs and SMMs; 2-3 base annual costs from recordkeeper; more time spent figuring out what goes where.....

[BeckyMiller]

First - the disclaimer - I am a CPA. I work on plan audits.

Now, the soap box? Why not just use prototype plans and get rid of the lawyers? Or do your administration in-house and get rid of the TPA?

If your auditor is giving you no value, get a better auditor. There should be real value to the plan audit. The review of the internal controls governing the plan's function should support the duties and obligations of the plan fiduciary. The review of the actual operations of the plan should catch potential operational defects before they get so large that correction is very costly. The auditor should be providing a management letter with ideas to enhance controls, consider other design options, etc.

[rcline46]

Ok Becky Miller, my time on the Soap Box. I have been responding to auditors for a very long time and here are my observations:

1. Plan audits are assigned to jr members of the firms who have no idea what they are doing and consequently take way too long.

2. In general auditors have no idea how plans operate and so I spend time training them and they bill the client for this time.

3. Audit requests bear no resemblance to anything we do - explanation - the terms used in the requests are not the terms used by TPAs and so are very confusing.

4. Audit letters ask for items not even remotely appropriate for plan types - that is they are general letters concocted by the AICPA and not tailored for the particular client and plan (see 1 above).

5. Auditors don't know who to ask for the correct information - such as asking the TPA for brokerage statements when they should ask the brokerage.

6. Auditors are too wrapped up GAAP and accrual accounting to properly audit a cash basis plan.

7. Auditors refuse to accept the categories used on the 5500 Schedule H for mutal funds and waste enormous time and client's money trying to break things down.

8. Auditors keep asking for more information, much of which does not exist in a TPA environment and is rarely on their audit letter (see 1, 2, 3, 4, and 5 above).

And lastly they charge way too much for value received.

Obviously this does not apply to all auditors, and Becky Miller may be one it does not apply to. But my experience over 30 years in the industry supports my contention.

And you don't want to discuss FASB 87/132 with me at all.

[Kirk Maldonado]

Pensions in Paradise:

You are right in that the situations are factually different.

But what if the two or three plans had to be aggregated for purposes of satisfying the coverage requirements. Would that change your perspective?

Becky:

Getting on the soapbox myself, I think that the auditors work is to examine the financial statements, not to determine whether the plan satisfies the qualification requirements. The vast majority of clients that I've talked to on this point believe that the financial audit is more along the lines of a fiduciary audit.

This isn't to criticize the work that the auditors do, it is just that the public's impression of their role is much different than what they actually do. Thus, the fault lies with the public, not with the auditors.

[rcline46]

Oh boy, now I am in trouble cuz I disagree with Kirk. If the public has the wrong impression, the it is the auditors problem for not properly and prominently explaining what they do, and more importantly WHY!

If it is demanded by the AICPA, then say so. If by some regulation, say so. Otherwise it just looks like a way to pad the bill.

Now I am not saying they shouldn't look deeper, but full disclosure and removing misimpressions are important.

[BeckyMiller]

Anyone who wishes to know what the auditor is expected to do in auditing an employee benefit plan should look to the AICPA. The standards are contained in one volume - the AICPA Audit and Accounting Guide for Employee Benefit Plans. It can be purchased from the AICPA for under $70. It is updated annually and includes a description of the required procedures for both full scope and limited scope audits of retirement and welfare plans.

But, realize that the auditor cannot advise you in advance of all of the steps to be taken. The point of the audit is to discover issues, if they are there. Thus, some unexpected procedures are likely to be applied. After the fact, however, the auditor should be able to explain why they applied those particular procedures and what they were attempting to discover.

I do agree that many auditors, unfortunately, do not know what is required of an EB audit. They may miss required procedures and / or perform unnecessary procedures. When in doubt, have them show you where the audit guide requires that they test a particular item or report in a particular manner. Be advised that many items are left up to the audit firm's discretion or judgement. Also, be advised that there are some fundamental inconsistencies between what Form 5500 requires and what the auditor is required by generally accepted auditing standards or accounting principles to perform. These are annoying, but required for the auditor to issue a "clean opinion." The DOL continues to review any Form 5500 filed with anything other than a clean opinion or the statutory limited scope opinion.

If you find that the plan auditor seems clueless, suggest that they join the AICPA audit quality center for more information on how to conduct an EB audit.