401k Retirement Plans and Audit Services
When is a retirement plan required to have a financial statement audit and who requires it?
The requirement to have an annual financial statement audit comes from the Employee Retirement Income Security Act of 1974 (ERISA) and is administered by the U.S Department of Labor (DOL). The audited financial statements are required to be attached to the Plan’s annual tax return (From 5500). In general, retirement plans are required to have an annual audit performed once they reach 100 participants. There are exceptions to this rule for a variety of scenarios so it’s best to consult your ERISA attorney, third party administrator, or your plan record keeper as your participant count nears 100.
Audits of Retirement Plans are Unique
Retirement plans function differently and have different priorities than operating businesses. These Plans are created for the benefit of the Plan Sponsor’s employees. With this in mind, the U.S. Department of Labor oversees all audits of retirement plans. The DOL acknowledges U.S. GAAP as an acceptable financial reporting framework and requires auditors to follow the Statements on Auditing Standards issued by the AICPA.
However, in addition to those requirements they also require the auditor to perform certain procedures unique to retirement plans. For example, audit procedures must be performed on individual participant accounts to ensure allocations are correct and testing the amount of time it takes a Plan Sponsor to remit participant contributions to the plan.
Full-scope v. Limited-scope audit
Defined contribution retirement plans can engage their auditor to perform a full-scope audit, or in some cases, a limited-scope audit. A full-scope audit includes audit procedures related to all aspects of the Plan’s financial statements and the notes to the financial statements. A limited-scope audit excludes audit procedures related to certain investments held by the plan, if the plan meets certain requirements.
In general, defined contribution plans can satisfy the DOL’s audit requirement with a limited-scope audit if the plan’s assets are held by a bank, insurance company, or similar institution that is supervised, regulated, and subject to periodic examination by a state or federal agency. If a plan qualifies and requests a limited-scope audit, the auditor does not perform any audit procedures related to the investment balances and related investment income for the investments held by a qualifying financial institution.
Due to the lack of audit procedures performed in a limited-scope audit the auditor’s report will be modified in some manner. The modification will describe the procedures not performed and cite the DOL rule that allows for this type of audit to be performed. Plans benefit from the limited-scope option because it reduces the overall cost to have the audit performed.
Additional work required during an initial audit
When you have your first retirement plan audit there will be additional audit procedures required. In order to perform the audit your auditor will have to perform certain procedures related to the Plan’s beginning balances for the year under audit. Each audit is different, but in some cases this could mean that several prior years may need to be tested to ensure the beginning balances are correct. If these procedures are not performed to your auditor’s satisfaction they may not be able to issue an audit opinion that is acceptable to the Department of Labor.