Auditing Employee Benefit Plans. Josie Hammond
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AUDITING EMPLOYEE BENEFIT PLANS
BY JOSIE HAMMOND, CPA, AND MELISSA FRIVOLD, CPA
Notice to readers
Auditing Employee Benefit Plans is intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication. This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein. However, neither the author nor publisher can guarantee the applicability of the information found herein. If legal advice or other expert assistance is required, the services of a competent professional should be sought.
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© 2018 Association of International Certified Professional Accountants, Inc. All rights reserved.
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ISBN 978-1-119-76380-2 (Paper)
ISBN 978-1-119-76399-4 (ePDF)
ISBN 978-1-119-76398-7 (ePub)
ISBN 978-1-119-76400-7 (oBook)
Course Code: 733843
EBPE-C GS-0418-0D
Revised: September 2019
Chapter 1 Employee Benefit Basics
Learning objectives
After completing this chapter, you should be able to do the following:
Recall how a benefit plan is defined according to the Employee Retirement Income Security Act of 1974 (ERISA), generally accepted accounting principles (GAAP), and the IRS.
Distinguish the designs and functions of today’s popular benefit plans.
Identify the auditor’s responsibility regarding tax compliance matters.
Recognize the various parties involved in the operation of a benefit plan and their roles.
Introduction
The purpose of this course is to assist you in auditing employee benefit plans. Most employee benefit plan audits are required for compliance with the Employee Retirement Income Security Act of 1974 (ERISA). A critical step in any audit process is to gain an understanding of the entity subject to audit. This chapter outlines the basic types of plans, the roles of the parties involved in running those plans and the tax rules, which define the limits of their operation. Chapter 2 will address applicable accounting and reporting standards, as well as recent developments in the employee benefit plan industry. Chapter 3 will discuss reporting and audit requirements.
ERISA is the starting point for plan definition. ERISA contains four titles. Title I includes the general Department of Labor (DOL) responsibilities for plans. It includes reporting and disclosure (where the audit rules are located), funding, benefit accrual and vesting, fiduciary conduct, and enforcement. Title II is the tax law requirements for benefit plans. This includes nondiscrimination, funding, vesting, coverage, and so on. Title III deals with specific jurisdiction and enforcement procedures, which are beyond the scope of this course. Title IV deals with the plan termination insurance program for defined benefit pension plans (including single employer, multiple employer, and multiemployer).
Most of this chapter will be spent dealing with the operational framework of benefit plans. This is particularly necessary, as there has been a significant change in the kinds of employee benefit plans offered since ERISA passed. Through the mid-1980s to early 1990s, fully insured noncontributory medical and life plans, and defined benefit plans were typical employer-sponsored plans. However, economic instabilities, the spiraling cost of medical care, the shift to two-income families with the resulting desire of employees to pick their personal benefit package from what is offered by both employers