Avoiding a DOL Audit of an Employee Benefit Plan Annual ReportFebruary 2012 – Newsletters For Your Benefit
Requirements under ERISA mandate that an administrator of an employee benefit plan, subject to Part 1 of Title I of ERISA, file an annual report with the Secretary of the Department of Labor (DOL). The annual report generally must include a Form 5500 Annual Return/Report of Employee Benefit Plan (Form 5500), along with the requisite statements and schedules.
Moreover, under ERISA, a plan administrator is required to engage, on behalf of the plan participants, an independent qualified public accountant (IQPA) to conduct the examination of the plan’s financial statements. Any individual who, under state law, is licensed or certified to practice public accounting is eligible to be a “qualified public accountant” for this purpose, and the examination is to be conducted in accordance with Generally Accepted Accounting Standards (GAAS). One of the purposes of this examination is to determine whether the plan’s financial statements are presented in accordance with Generally Accepted Accounting Principles (GAAP).
The purpose of the IQPA is to provide plan participants with some assurance that the plan’s financial statements have been subject to an annual independent examination and the plan’s processes and financial controls supporting the financial statements have been examined. However, ERISA and DOL regulations impose additional requirements on the audit. The auditor must issue an opinion of the IQPA in connection with the audit, and the auditors have the following options with respect to the such opinion:
- An Unqualified Opinion is issued when the IQPA concludes that the plan’s financial statements present fairly the financial status of the plan as of the end of the period audited;
- A Qualified Opinion is issued when the IQPA concludes that the plan’s financial statements present fairly the financial status of the plan as of the end of the period audit, except for the effects of one or more matters described in the opinion;
- A Disclaimer of Opinion is issued when the IQPA does not express an opinion on the financial statements because he or she has not performed an audit sufficient in scope to enable him or her to form an opinion on the financial statements; and
- An Adverse Opinion is issued when the IQPA concludes that the plan’s financial statements do not present fairly the financial status of the plan as of the end of the audit period.
In most cases, an unqualified opinion is the only option accepted by the DOL, with the most notable exception being the limited scope audit in which the auditor, generally, need not audit investment information certified by certain banks, brokerage houses or insurance carriers. Auditors with limited plan audit experience often do not realize the limits on limited scope audit opinions and are under the false assumption that they may include any number of caveats, may fail to ascertain the fair market value of hard to value assets such as employer stock or real estate investments or do not verify participant data. Any one of these failures or caveats would cause the report to become noncompliant and could subject the plan to DOL audit and penalties.
Most often, the deficiencies in the opinion that bring it to the DOL’s attention can be traced to auditors with limited employee benefit plan audit experience. The reasons for the failures often include: (1) the auditor’s lack of technical training and knowledge; (2) the auditor’s lack of familiarity with employee benefit plans; (3) inadequate quality control in the audit process; and (4) a failure by the auditor to understand the requirements for limited scope audits.
One of the most common reasons for a deficient accountants’ report is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Therefore, the selection of the plan auditor is an important task for any plan administrator. As noted above, federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a state regulatory authority. However, it is essential that the plan auditor have experience in auditing employee benefit plans.
Plan administrators have, perhaps, a more compelling reason to make certain that the plan audit satisfies the requirements set forth under ERISA; namely, to avoid a DOL audit. Audits of noncompliant opinions are conducted by the Office of the Chief Accountant (OCA) for the Employee Benefits Security Administration of the DOL. If the plan administrator fails to engage an auditor experienced in the plan audit process, there is a much higher likelihood that the plan annual report will be selected for audit by the DOL.
If the DOL finds that the annual report is incomplete or if there is a material qualification by the IQPA in the audit opinion, then the DOL will likely reject the annual report. It is critical that any plan administrator who receives a notice of rejection from the OCA act immediately to rectify the deficiency. Depending upon the nature of the deficiency, the DOL may grant extensions, but it is imperative that the extension be requested within the 45-day period, which is typically the time frame in which a response is required. If a satisfactory report is not received by the DOL within the 45-day (or extended) period, the DOL will likely advise the plan administrator of its intent to impose a penalty against the plan administrator. The most commonly imposed penalty is $50,000, although the DOL has the authority to impose a penalty of up to $1,100 per day. In order to prevent the DOL from imposing the penalty, the plan administrator must file a request for hearing and answer with the Office of Administrative Law Judges within 35 days of the Notice of Determination. Unless a hearing request is filed within the 35-day period, the penalty will become permanent and unappealable. The process is a formal legal proceeding, and it is essential that the plan administrator retain experienced counsel. Once the request for a hearing is filed, the plan administrator may negotiate with the DOL to reduce or waive the penalty as long as the audit opinion is revised to meet the requirements of the regulations.
Plan administrators are well advised to review their selection of auditors and the annual opinions that accompany the audit opinion. Their diligence will be rewarded by avoiding costly DOL audits. Those administrators who receive a notice from the OCA should react quickly and address the issues raised in the notice immediately. The assistance of experienced benefits counsel is essential in satisfactorily resolving these issues.