What are the Reporting Requirements for a Pooled Employer Plan?

In our previous blog post, Pooled Employer Plans (PEPs): The Basics, we outlined the basics of a PEP and will not dig into the details of the financial reporting requirements for these plans. The administrator of a PEP must file an annual Form 5500, Annual Returns/Reports of Employee Benefit Plan, to which the PEP administrator must attach additional information, including a list of employers in the plan, a good faith estimate of the percentage of total contributions made by each employer during the plan year, the total of the individual account balances attributable to each employer in the plan, and the identifying information for the Pooled Plan Provider (PPP). PEPs cannot use the Form 5500-SF to satisfy their annual reporting obligations. They must file Form 5500.

PEPs that have 100 participants or more are required to have an annual financial statement audit.

The SECURE Act did not establish a new audit threshold for PEPs.

Permission Granted Does Not Mean Action Will be Taken

Although Section 101 of the SECURE Act amended ERISA section 104(a)(2)(A) to permit the Secretary of Labor to establish simplified reporting for MEPs subject to ERISA section 210(a) with fewer than 1,000 participants in total, as long as each participating employer has fewer than 100 participants, the DOL is not currently proposing to amend the current reporting rules to establish a “simplified report” for such plans with fewer than 1,000 participants.

Unique items for auditors to consider

• Engagement Acceptance: AU-C section 220, Quality Control for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards, addresses the engagement partner’s responsibilities relating to audit client acceptance. It requires the firm to obtain information considered necessary in the circumstances before accepting an engagement with a new client. An important consideration is whether the engagement team is competent to perform the PEP audit engagement and has the necessary capabilities, including time and resources.
• Understanding the Entity: The amount of time and effort required to complete the audit will depend on many things, including the complexity of the plan and its operations. AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, requires that the auditor obtain an understanding of the entity and its environment, including the entity’s internal control. The understanding of the entity should include:

• • Relevant industry, regulatory, and other external factors, including the applicable financial reporting framework. For PEPs, additional regulatory considerations will include the provisions of the SECURE Act and its regulations.
  • The nature of the entity, including:
    • Its operations. The complexity of the PEP’s operations will depend largely on the plan document and plan composition, including the number of participating employers, trustees, custodians, and payroll systems, as well as the extent to which plan provisions are allowed to vary among the participating employers (e.g., definition of compensation, eligibility, vesting, etc.).
    • It’s ownership and governance structures. The identification of those charged with governance for a PEP will require understanding the responsibilities of the various parties involved (which may be parties outside of the PPP) and how those responsibilities are executed.
    • The types of investments that the entity is making and plans to make, including investments in entities formed to accomplish specific objectives.
    • The way that the payroll integration is structured and how contributions are funded.

Understanding the PEPs internal control may include not only controls at the PPP, but also the controls at the participating employers that may affect the reliability of data and the design of audit procedures, such as controls over human resources information systems and payroll.

• Audit evidence: AU-C section 500, Audit Evidence, requires that the auditor design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. The entity’s accounting records are an important source of audit evidence.

For PEPs, audit evidence may come from various sources, depending on whether transactions are initiated at the PPP or the participating employer level. Discussions, inquiries, and information requests may need to be directed to parties other than the PPP.

Following is an example of where transactions may be initiated in a PEP.

Note that it may not be possible to fully delegate payroll functions to the PPP since employers must set up new employees pay rates and hours worked on the payroll system, and participant elections may not be set up to be entered directly b participants into the payroll system.

• Economies of Scale, Maybe: The extent to which the PEP will result in lower audit fees per employer than if they had an individual plan will depend on how homogeneous the plan provisions adopted by the member employers are, how many different payroll companies are involved, the level of integration between the recordkeepers and the payroll softwares, the relative significance of each employer’s assets, and the availability of SOC 1 reports for the relevant service providers. A PEP that mandates the same plan design and the same payroll company with full integration with the recordkeeper will have a better chance of lower audit fees than one that allows full flexibility of choice in design and payroll providers. When it comes to PEPs, individuality doesn’t pay off, it makes you pay.