Art of the Qualified Plan Audit

There is a popular philosophical question that asks if a tree falls in a forest, and no one is around to hear it, does it make a sound?

As auditors, we are required to review the controls in place at a plan sponsor of a retirement plan and its service providers to assess the risk of material misstatement resulting from control risk. In doing so, we constantly evaluate the adequacy of the control structure and recommend improvements to strengthen the processes to prevent errors.

The use of the wrong definition of compensation is the most common error found in employee benefit plan audits, and it can be a very costly mistake to correct in accordance with the provisions of the IRS’ Employee Plan Compliance Resolution System (EPCRS).

Plan administrators probably view the management representation letter as a document they must sign so they likely do so without reading it closely.

In the retirement plan industry, 2 + 2 can be 4, or many other amounts depending on the actuarial assumptions used. Similarly, one-participant plans can actually cover hundreds of participants.

One of the most common operational errors when administering retirement plans is the failure to implement a participant’s elective deferral election or change in percentage.

Most plan sponsors know that their retirement plans are subject to discrimination tests, generally designed to prevent highly compensated employees (HCEs) from obtaining a benefit that is disproportionately favorable when compared to the benefits of the non-highly compensated employees (NHCEs).

In a previous blog, DOL Audit Quality Study: Employee Benefit Plan Auditors Are not Making the Grade, we discussed the results of the 2015 Audit Quality Study performed by the Department of Labor (DOL).

It may be counter-intuitive, but reducing the number of employees who are eligible to participate in a retirement plan could be the greater good in certain situations.

Every year, at least one retirement plan service provider tells us that a plan qualifies for a limited scope audit because their company has an SOC 1 report.