The Importance of Obtaining a Quality Audit

Posted on November 24 2015 by admin

On November 16, 2015, the Department of Labor’s (“DOL”) Office of Chief Accountant sent an e-mail to all plan administrators of plans which are required to have an annual financial statement audit alerting them of the importance of obtaining a quality audit from a qualified and experienced CPA firm.

This is primarily in response to the DOL’s report issued in May 2015 in regards to audit quality where it was identified that audit firms with smaller employee benefit plan practices not only have a significantly higher overall deficiency rate but also had a high number of deficient audit areas. The study focused on 2011 Form 5500 filings, of which there were 81,162 filings with audits performed by 7,330 CPA firms. Of these 7,330 CPA firms, 95% of the CPA firms audit less than 25 plans on an annual basis and 50% audit 1 or 2 plans.

This email from the DOL focuses on audit quality and that selecting a qualified CPA who has the expertise to perform an audit in accordance with professional auditing standards is a critical responsibility in safeguarding the plan’s assets and ensuring compliance with ERISA’s reporting and fiduciary requirements. It also notes that employee benefit plan audits have unique audit and reporting requirements and are different from other financial statement audits, and that substandard audit work can be costly to plan administrators and sponsors.

The email lists the following qualifications to ask of a CPA firm:

  • The number of employee benefit plans the CPA audits each year, including the types of plans;
  • Henry & Horne, LLP audits approximately 50 benefit plans on an annual basis with individual assets ranging from $100K to over $350M and participant counts surpassing 6,000 participant.
  • The extent of specific annual training the CPA received in auditing plans;
  • Henry & Horne, LLP is a member of the American Institute of Certified Public Accountants (“AICPA”) Employee Benefit Plan Audit Quality Center which provides training, support materials and alerts on trending topics. In addition, Henry & Horne, LLP attends the annual employee benefit plan conference sponsored by the AICPA.
  • The status of the CPA’s license with the applicable state board of accountancy;
  • Henry & Horne, LLP is an active member in the Arizona State Board of Accountancy.
  • Henry & Horne, LLP is an active member in all other states where registration is required for work performed within the state.
  • Whether the CPA has been the subject of any prior DOL findings or referrals, or has been referred to a state board of accountancy or the American Institute of CPA’s for investigation; and
  • Henry & Horne, LLP has not been the subject of any prior DOL findings or referrals.
  • Henry & Horne, LLP’s employee benefit plan audit work is not part of a state board of accountancy or an AICPA investigation.
  • Whether or not your CPA’s employee benefit plan audit work has recently been reviewed by another CPA (this is called a “Peer Review”) and, if so whether such review resulted in negative findings;
  • Henry & Horne, LLP’s employee benefit plan audit work is subject to Peer Review by another CPA firm every three years. The firm’s last Peer Review was for the year ended May 31, 2013 has received a peer review rating of Pass.
  • Henry & Horne, LLP’s employee benefit plan audit work is also subject to internal inspections by the firm’s Audit and Accounting Committee on a quarterly basis.

If you have any questions in regards to the DOL’s email, audit quality report or Henry & Horne, LLP’s qualifications, please contact us.

By Kevin Bach, CPA, CVA

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Participant Loans – IRS Requirements

Posted on November 17 2015 by admin

If you participate in your Company’s 401k Plan, you are probably already aware that your Plan may offer an option for you to take out a loan from your 401k balance. These loans are tax free and typically require you to pay your loan back plus interest over a certain period of time. There are a few key requirements that your 401k loan needs to meet to be in compliance with the Internal Revenue Service (“IRS”). These key requirements are as follows:

  • The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less.
  • Generally, the employee must also repay the loan within five years and must make payments at least quarterly. The law also provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence which can extend the loan repayment period to 30 years.
  • If an employee has an outstanding loan and terminates employment, plan sponsors may require an employee to completely repay the outstanding loan balance. If the employee is unable to repay the loan, then the employer will treat the loan as a deemed distribution and will report it to the IRS on Form 1099-R, which means the employee will then need to pay taxes on the distributed loan amount.

In addition to the IRS requirements noted above, each plan can have its own specific loan policy that participants are required to follow. These loan policies may require their own minimum loan balance amount and also limit the number of loans allowed at any given time. Participants should receive information from the plan administrator describing the availability of and terms for obtaining a loan.

By Ryan G. Wojdacz, CPA

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Investment Policy – Why and What to Include?

Posted on November 3 2015 by admin

An investment policy is created by an investment committee (those charged with making investment decisions for a retirement plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members/trustees or to clarify expectations for prospective money managers who may be hired by the committee.

According to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for every qualified company retirement plan (i.e. 401[k], profit sharing, pension, 403[b]) there are certain fiduciary responsibilities for managing plan assets with care, skill, prudence and diligence of a prudent expert and by diversifying the investments of the plan so as to minimize the risk of large losses. This investment policy statement documents these fiduciary responsibilities and ensures fiduciaries are adhering to these responsibilities.

ERISA and the Department of Labor (“DOL”) have established the following procedures for plan trustees:

  • An investment policy must be established
  • Plan assets must be diversified
  • Investment decisions must be made with the skill and care of a prudent expert
  • Prohibited transactions must be avoided

An investment policy statement should set forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan’s assets, and provides the basis for evaluating the plan’s investment results.

When a plan is audited under ERISA, the auditor will request a copy of the most current investment policy being followed by the trustees and review it for the items listed above. Having this policy statement compels the trustees to be more disciplined and systematic, which will improve the investment goals of the plan.

By Leslie A. Lee, CPA

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2016 Retirement Plan Limits

Posted on October 27 2015 by admin

On October 21, 2015, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments (“COLA”) for the 2016 tax year. These COLA rates are used to adjust over 40 tax provisions from the standard deduction and personal exemption to retirement plan limits. Based on changes in consumer price index, used by the IRS to determine the COLA rates, which was less than the statutory threshold to trigger increases, there are no increases in the 2016 limits.

See the tables below, for a comparison of the 2015 and 2016 retirement plan limits:


For further information, click here.

By Kevin C. Bach, CPA, CVA

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Compliance for Small Company Employee Benefit Plans

Posted on October 21 2015 by admin

As another employee benefit plan season draws to a close, I was reflecting on the many compliance errors that we find each year while auditing plans. The plans that require audits are typically larger employers with over 120 employees. These plans are typically administrated by professionals with significant experience in their fields. And yet, due to the complexity of employee benefit plans, we still find compliance errors in many of these plans during the course of our audits.

This led me to think, what about those plans that aren’t required to get audited each year? These would be smaller employers. Many of these plans are likely administered by a payroll clerk or bookkeeper with limited experience in employee benefit plans. If I had to guess, I’d say that the likelihood for errors would be much higher. So, what can smaller plans do to make sure they are not perpetually making compliance errors in their plans?

Many small companies are now engaging audit firms to perform agreed upon procedures, or procedures that are substantially less in scope than an audit but that are specifically tailored to detect the most common compliance errors. An auditor would focus these procedures on the areas that most frequently cause compliance errors for both large and small companies alike. A few examples are:

  1. The auditor can design specific procedures to determine if the correct definition of compensation is being adhered to by the plan. This will involve reading the plan document’s definition of eligible compensation and then determining if employee compensation is being correctly deferred. For example, if the employer is not deferring on bonus compensation but the plan document includes bonuses in the definition of compensation, these procedures would identify this error. In my experience auditing benefit plans, the errors that end up being the most costly to clients are typically involving the definition of compensation. It is best to catch these as early as possible as the employer is required to correct the error as far back as the error was occurring.
  2. The auditor can recalculate the number of days from each pay date to the date that deferrals are contributed to the plan. If the contributions are not consistently contributed within a few days, the auditor can identify which contributions may need to be considered as late contributions. More importantly, the auditor can identify why the contributions were contributed late to the plan and recommend improved controls to prevent future late deferrals.
  3. The auditor can recalculate employer contributions to determine if the plan is calculating them in accordance with the plan document. For example, the plan document might call for the employer match to be calculated on an annual basis, but the employer might be calculating on a pay period basis. If this is the case, a true-up contribution could be required at the end of each year. If this is not happening, the employer will need to make the contributions plus lost earnings for prior years missed.

I would highly recommend for any small employer plan to engage a benefit plan auditor to come and “kick the tires” on your benefit plan. Finding any compliance errors now will save additional expense in the future and give you peace of mind that your plan is in compliance with regulations.

By Rex Platt, CPA

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401K Pre-Approved Plans 2016 Deadline

Posted on October 14 2015 by admin

Some employee benefit plans are set-up as pre-approved plans. Typically this includes prototype and volume submitter plans. This basically means that the plan is operating under a Plan Document from a financial institution, adviser or similar provider that has requested IRS opinion or advisory letters on the tax status of the Plan. These types of plans use IRS approved wording and generally have limited customization.

Revision of the plan

Pre-approved plans are generally updated entirely by your provider every 6 years and they send a request for a new opinion or advisory letter from the IRS. This is to ensure that as the law changes the retirement plan documents comply with these revised laws. According to the website, most of these letters for the latest round of approvals were issued on March 31, 2014. Employers have two years from the date of issuance to adopt these updated plans; therefore, the upcoming deadline is April 30, 2016. If adoption is not completed within this time frame, the plan will not be in compliance with the current tax laws.

How to adopt a revised plan document

The first step is to contact your provider. They should have sent you a revised plan document which would be approved by the IRS. This will comply with law changes as set forth on the 2010 cumulative list of changes on the website. Be aware that even if you amended your plan you should still be sure to adopt a Pension Protection Act of 2006 (“PPA”) plan document.

It is important to ensure that your plan is up to date and in compliance with current tax laws to ensure the plan is eligible for tax benefits. If you are unsure if you are in compliance, we recommend contacting your provider to ensure all of your plan documents are up to date.

By Brie C. Keckler, CPA

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FASB’s Employee Benefit Plan Reporting Simplification

Posted on September 29 2015 by admin

On July 31, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. The ASU was in response to consistent feedback received from employee benefit plan financial statement users. The ASU covers three areas for entities that follow the requirements in FASB Accounting Standards Codification (“ASC”) Topics 960, 962 and 965:

I. Fully Benefit-Responsive Investment Contracts

Part I of the ASU applies to applicable entities that hold investments in fully benefit responsive investment contracts (“FBRICs”), as defined by the FASB ASC Master Glossary. This update redefines a FBRIC and requires that FBRICs be measured, presented and disclosed at contract value, as contract value is the relevant measure of the portion of the net assets available for benefits of a defined contribution plan for a FBRIC. This update eliminates the need for a plan to calculate the fair value and present a reconciliation from contract value to fair value as the employee benefit plan financial statement users consider this to not be decision-useful information, as contract value is the amount participants would normally receive if they were to initiate permitted transactions.

II. Plan Investment Disclosures

Part II of the ASU is to reduce the complexity in the employee benefit plan financial statement in line with the FASB’s overall Simplification Initiative as minimal changes have been made to pension plan accounting since 1980 (release of FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans) while other portions of FASB were updated and were applicable to employee benefit plan financial statements which resulted in increased disclosures and accounting requirements.

  • Elimination of investments that represent more than 5% of net assets available for benefits
  • Elimination of the disclosure of net appreciation/depreciation by investment type
  • Elimination of the need to disaggregate investments by nature, characteristics, and risks within the fair value hierarchy
  • Elimination of the need to disclose an investment’s strategy if the investment is a fund that files a Form 5000 as a direct filing entity

III. Measurement Date Practical Expedient

FASB ASU 2015-04 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, was issued in April 2015, which provided a practical expedient that allows employers to measure defined benefit plan assets on a month-end date that is nearest to the employer’s fiscal year-end, when the fiscal period does not coincide with a month-end. Thus, part III of this update provides a similar measurement date practical expedient for employee benefit plans. If a plan applies the practical expedient and a contribution, distribution, and/or a significant event occurs between the alternative measurement date and the plan’s fiscal year-end, the plan should disclose the amount of the contribution, distribution, and/or significant event. The plan should also disclose the accounting policy election and the date used to measure investments and investment-related accounts.

The ASU is effective for fiscal years beginning after December 15, 2015 and early application is permitted. Entities can separately adopt each part of the ASU, but must implement all components within each part. For more information read the ASU at

By Kevin C. Bach, CPA, CVA

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Opt-Out Forms: Employees that Decline to Participate in Your 401(k)

Posted on September 15 2015 by admin

You’ve got your process figured out – 401k benefit packages are given to employees the date they’re hired, or maybe when they become eligible to participate, or maybe you rely on your TPA to communicate to the employee how to enroll when eligible. You collect all necessary enrollment forms for employees that want to participate so you can get it sent in, and get their payroll deduction setup, and then your job is done, right?

Not necessarily. What about those employees that didn’t want to participate even though they were eligible? Did you collect the enrollment form with “I do NOT wish to participate…” checked and signed by the employee or any other form of support declining enrollment? If you didn’t, there are some risks you’re inviting in your front door that you could have easily avoided!

For instance: what if an employee insisted they had intended to participate, and also insisted that they had not been properly informed they were eligible. Regardless of the truth in that statement, do you have proof otherwise? Because if you don’t, you, the employer, will have to make a QNEC (Qualified Non-Elective Contribution, or “Corrective Contribution”) contribution to the plan on behalf of that employee because of the “missed deferral opportunity.” This will be equal to 50% of the employee’s “missed deferral,” calculated by multiplying the actual deferral percentage for the year of exclusion for the employee’s group in the plan by the employee’s compensation for that year. If you contribute a matching contribution, the fun doesn’t stop there! You are also required to make a corrective contribution for any matching contribution they would have received had they been deferring their missed deferrals.

Does any of this apply to you? Make sure you read the full guidance on this and other types of corrective procedures in Rev. Proc. 2013-12. Might any of this apply to you in the future? YES! This is one simple control you can implement to reduce these risks significantly!

By Audrey D. Richards

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Do I Need an Audit?

Posted on August 18 2015 by admin

As a sponsor of an employee benefit plan, along with annual reporting requirements, you may be required to undergo an audit of your plan’s financial statements. What are the reporting requirements and what triggers an audit? This varies depending on the type and size of the plan you sponsor.

One participant plans (a business owner with no employees) have the option of filing either Form 5500-EZ or Form 5500-SF. However, if plan assets are less than $250,000, no filing is required. One participant plans have no audit requirement.
Plans with fewer than 100 participants, but are not one participant plans, must file Form 5500-SF electronically. Plans of this size are considered small plans and also have no audit requirement.

Plans with 100 or more participants must file their Form 5500 electronically. Plans of this size are considered large plans and, generally speaking, will require audited financial statements to be submitted with the Form 5500. Of course, there is an exception to this rule called the 80-120 rule. The four basic variations of this rule are as follows:

  • Plan filed as a small plan in the prior plan year with no more than 120 participants at the beginning of the current plan year – the plan may continue to file as a small plan and no audit is required
  • New plan with 100 or more participants at the beginning of the plan year – must file as a large plan and an audit is required
  • Plan filed as a large plan in the prior plan year – the plan must continue to file as a large plan and an audit is required until that time the number of participants falls below 100 at the beginning of the plan year
  • Plan filed as a large plan in the prior plan year with less than 100, but greater than 80 participants at the beginning of the current plan year – the plan has the choice of continuing to file as a large plan where an audit is required or the plan may file as a small plan and avoid the audit requirement

As a reminder, when determining the number of participants, there are three types of individuals that must be included in the count: all employees who are eligible to participate (whether they have chosen to or not); those who have retired or separated from employment, but who still have account balances; and deceased individuals whose beneficiaries are either receiving benefits or are entitled to receive benefits.

By Crystal Becerril, CPA

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Where Are You Saving Your Money?

Posted on August 4 2015 by admin

As an auditor of employee benefit plans, I often talk with clients about their plan’s participation rates and suggest ideas on how to increase participation. As part of my daily routine, I read numerous articles from different financial sources. I came across a CNBC article published on July 29th, 2015 that I found to be rather surprising. The article is titled “More American savers skimp on retirement plans” by Tom Anderson, Personal Finance Writer for CNBC.

Hearts and Wallets is a retirement market researcher and they published a recent news analysis showing that Americans are saving more, but not by the method of their employer sponsored retirement plans. The average annual household savings has increased in percentage over the last two years, based on a survey of 5,500 U.S. households by Hearts and Wallets. The Federal Reserve Bank in St. Louis stated that the personal savings rate in May 2015 was 5.1%. However, the percentage of household savings that went into employer sponsored retirement plans has been decreasing over the last two years according to Hearts and Wallets.

I ask myself… Why would more Americans be saving, but not taking advantage of employer sponsored plans? Would you leave free money on the table? These plans can save you money spent on investment management fees and often employers will match your savings contribution up to a certain amount. If you are going to save and you have the option available to participate in an employer sponsored retirement plan, it doesn’t make sense why you wouldn’t want to do that. Most plans accept rollovers (accounts of new participants from other plans) so once you leave your employer you can join the next employer’s plan.

When I speak with employers about their retirement plans and ask them what their goals for the plan are, I generally hear the same two goals. These are to increase the number of employees that participate in the plan and to increase the amount of deferrals of current participants. It is in the best interest of the employer to have a majority of their workforce saving money for retirement. In order to achieve those two goals, there are numerous avenues that an employer may use. The most obvious would be to offer an employer match. If one is already offered, then increase the amount of the match. A less obvious way would be to add automatic enrollment to the retirement plan.

According to a November 2014 study by Tower Watson, employers with participation rates above 80% in their defined contribution plans increased from 50% in 2010 to 64% in 2014. During this same time period, the share of companies offering automatic enrollment rose from 57% to 68%. There is a proven link between increased participation and retirement plans using automatic enrollment. Employers already using automatic enrollment in their sponsored retirement plans should consider adding automatic escalation to help increase deferral amounts of participants. Automatic escalation typically will increase each participant’s deferral rate a certain percentage annually, unless the participant chooses not to accept the increase. Another avenue to increase participation would be changing the fee structure of the plan so the participant pays less and the employer pays more of the fees.

Regardless of the avenue taken, it is important that employers spend time to send the message and educate their employees of the benefits available by participating in sponsored retirement plans.

By Josh Mitchell, CPA

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Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.

Before posting a comment on a blog post please be aware that we do not give free advice to non-clients by email, comment response, or phone. Thank you!

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