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During the past couple of months, many businesses have been going through audits of their company’s retirement plan. As you may know, these compliance audits differ vastly from the traditional financial statement audits. This is due to not only the compliance regulations of these plans, but also the different method of accounting for pension plans. This article is intended to briefly cover the basics of retirement plan audits so that you and your company can better understand how they work and when you might need one.
To start off, there are two main types of retirement plans out there, Defined Benefit Plans and Defined Contribution Plans. The differences between the two are described in the boxes below:
|
Factors |
Defined Benefit Plan |
Defined Contribution Plan |
|
Overview |
Promises to pay you a certain amount of retirement income for life |
Contributions to the plan are guaranteed, but the amount of retirement income is not |
|
Who Contributes |
Employer and employee |
Employer and employee |
|
Examples |
Flat-Benefit Formulas, Career-Average Formulas, and Final-Pay Formulas |
401K, Profit-Sharing, and Employee Stock Ownership Plans |
These retirement plans must file the Form 5500 to the IRS each year that the retirement plan is in effect. The IRS requires these plans to report their financial condition, investments and operations for the current year ended (January 1st through December 31st if the plan is on a calendar-year end). This form is due to the IRS on the last day of the seventh month after the plan year end. If that plan year ended on December 31, the Form 5500 is due on July 31.
Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file the Form 5500. The Department of Labor (DOL) defines a participant in a retirement plan as any employee or former employee of an organization that is eligible to receive a benefit from that employee benefit plan. The DOL requires that the auditor of this plan be an independent Certified Public Accountant (CPA).
The DOL suggests that the company administering the retirement plan choose an independent CPA with extensive experience in auditing employee benefit. By doing so, the company can prevent deficiencies in the independent CPA’s report on the retirement plan.
For any questions regarding retirement plan audits and if your company’s needs one, please contact your MKS&H representative or call 410-296-6200 to speak to one of our retirement plan audit experts.
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Article Provided By Ryan Harvey, CPA, MKS&H Staff Accountant
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs. Please visit www.MKSH.com for more information.
