Transcript Slide 1

Auditing and Financial Reporting
Overview of Employee Benefit Plans
Andy Harper, CPA, CBA
Ted Hotz, CPA
Ashley Ogle, CPA
Pugh & Company, P.C.
Learning Objectives
To
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obtain a basic understanding of the following:
Background information on EBP’s
When is a plan required to be audited?
Types of Plans
EBSA Oversight of Audit Firms
Common Audit Deficiencies
Industry and Regulatory Update
Resources for auditors, plan sponsors and participants
Limited-scope Audits
Electronic Filing
Overview of auditing for employee benefit plans
Overview of financial reporting requirements
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Background Information on EBP’s
• ERISA signed into law in 1974
• Most plans were defined benefit and
health and welfare plans that provided
benefits from employer-funded
investments
• Typical investments at that time were U.S.
government securities, publicly traded
stock, and corporate bonds whose value
was easily determined by reviewing the
financial pages of the daily newspaper
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Background Information on EBP’s
• Today, most plans are defined contribution
plans funded by participant and/or
employer contributions
• Investments are often “hard-to-value”
such as:
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Hedge funds
Private equity funds
Real estate funds
Venture capital funds
Commodity funds
Non-marketable derivatives
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Background Information on EBP’s
• EBP’s are significant economic entities in
the United States today.
• There are nearly 695,000 private pension
plans covering more than 122 million
participants. In addition, there are
approximately 5 million health and welfare
benefit plans.
• EBP’s own significant amounts of
investments. Private pension plans own
more than $5.2 trillion in assets.
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Background Information on EBP’s
10,000 independent qualified public
accountants audit 76,000 plans
– 6 perform more than 1,000 audits,
(80% of all plan assets)
– 64 perform more than 100 audits
that cover 25,000 plans
– 8,000 perform 5 or fewer audits
– 4,800 perform only 1 audit
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Audit Requirement
• When is an audit required?
– Generally when a plan has 100 or more
participants at the beginning of the plan year.
– Instructions to Form 5500 define “active
participants” as those who are eligible to
participate in the plan (that is, to contribute to
the plan) as well as those who are
participating.
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Audit Requirement
Number of Participants at
Beginning of Current Year
Requirements
Followed for the
Previous Year
Form 5500
Requirements to Be
Followed for the
Current Year Form 5500
Fewer than 80
“Small” plan
“Small” plan
Fewer than 80
“Large” plan
“Small” plan
80-99 (inclusive)
“Small” plan
“Small” plan
80-99 (inclusive)
“Large” plan
May elect to file Form 5500 again as a
“large” plan or switch to a “small” plan
100-120 (inclusive)
“Small” plan
May elect to file Form 5500 as a
“small” plan again or switch to a
“large” plan
100-120 (inclusive)
“Large” plan
“Large” plan
More than 120
“Large” plan
“Large” plan
More than 120
“Small” plan
“Large” plan
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Types of Employee Benefit Plans
• Defined Benefit Pension Plans
• Defined Contribution Pension Plans
• Health and Welfare Benefit Plans
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Types of Employee Benefit Plans
EBP’s may also be classified as follows:
• Single-employer, multiemployer, or
Multiple-employer plans
• Noncontributory or contributory
• Funded or unfunded
• Trusteed or nontrusteed
• Qualified or nonqualified
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Types of Employee Benefit Plans
Defined benefit plans can be:
• Defined benefit retirement plan
• Cash balance pension plan
• Pension equity plan
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Types of Employee Benefit Plans
Defined contribution plans can be:
• 401(k) plan
• Profit-sharing plan
• Money purchase plan
• Stock bonus plan
• Employee Stock ownership plan
• KSOP
• Target benefit plan
• Thrift or savings plan
• 403(b) plan
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Types of Employee Benefit Plans
403(b) Plans
• Sponsored by charities and schools
(subject to ERISA)
• and religious organizations and
governments (not subject to ERISA)
• Similar to 401(k) plans
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Types of Employee Benefit Plans
Cash Balance Plan
• Considered a defined benefit plan and must follow the rules
relating to those plans.
• Looks like a defined contribution plan to the participant.
• A hypothetical account is maintained for each participant,
the company makes annual notional contributions, and
interest is credited on the account.
• The contribution to the account is either a flat dollar
amount or a percentage of compensation.
• Like any defined benefit plan, benefits are based on the
plan’s formula and not on the actual investment earnings
on plan assets.
• Actual investment earnings of the plan assets also do not
affect the account balance.
• The company rather than the employee bears the
investment risk.
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EBSA Oversight of EBP Audits
Top-down, bottom-up approach
• For firms with 200 or more clients
(inspection)
– On-site review of a sample of engagements
– Meeting with firm management
– Review of policies and procedures
• For firms with between 100 and 200
clients (mini inspection)
– Work papers reviewed in EBSA’s office
– Top level communication performed through
use of questionnaire and telephone interview
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EBSA Oversight of EBP Audits
• For audit firms with fewer than 100 EBP
clients, the EBSA focuses its review on
selected work papers (desk review).
• Focus is on firms performing a small
number of EBP audits
– Target plans with assets >$10 M
audited by firms with < 40 EBP audits
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EBSA Oversight of EBP Audits
• To date, the EBSA has competed:
– 22 inspections
– 15 mini inspections
– Over 1,800 desk reviews
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Common Audit Deficiencies
DOL & Peer Review Findings
• The auditor undertook an engagement that could
not reasonably be expected to be completed
competently.
• Improperly worded reports related to GAAS and
GAAP.
• Audit reports that incorrectly contain language for
a full scope audit when the auditor was engaged
to perform a limited scope audit.
• Audit reports that inappropriately identify
statements and /or supplemental schedules that
are not presented or the audit report does not
extend to supplemental schedules that are
presented.
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Common Audit Deficiencies
DOL & Peer Review Findings
• Audit scope inappropriately limited. Entity holding
the plan's investments did not qualify for limited
scope treatment pursuant to DOL regulation
29 CFR 2520.103-12 .
• Inadequate documentation of auditor’s
understanding of internal control: the control
environment, risk assessment, control activities,
information and communication, and monitoring.
• Reliance on audit information from the plan
sponsor but no documentation of any
understanding of the internal controls at the plan
sponsor.
• Over-reliance on a SAS 70 report or relied on the
report without having obtained and read the
report.
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Common Audit Deficiencies
DOL & Peer Review Findings
• Reliance on a SAS 70 report that covers a
different reporting period than the plan's fiscal
year. Auditor failure to take actions to obtain an
understanding of the internal control environment
at the TPA during the period under audit.
• No analytical review in the planning stage
• One time all-inclusive brainstorming not
acceptable to DOL
• No audit programs
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Common Audit Deficiencies
DOL & Peer Review Findings
• Failure to disclose (or inadequately
disclosed) the following in the footnotes:
– investments that represent 5 percent or more
of total net assets.
– the net change in fair value of each significant
type of investment.
– the amount and disposition of forfeited nonvested accounts.
– the plan's federal tax status.
– related party transactions.
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Common Audit Deficiencies
DOL & Peer Review Findings
• Footnotes failed to disclose…
– the policy for the payment of administrative expenses
– a description of the method and significant assumptions
used to determine the fair value of investments.
– the use of estimates
– the funding policy of the plan
– concentrations of credit risk arising from all financial
instruments
– the vesting provisions
– the termination provisions and priorities for distribution
of assets
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Common Audit Deficiencies
DOL & Peer Review Findings
• Footnotes failed to disclose…
– basis for determining participant contributions.
– a reconciliation between the financial
statement amounts and amounts on Schedule
H of Form 5500 .
– Defined Benefit Plans: The plan's status with
respect to any applicable minimum funding
requirements.
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Common Audit Deficiencies
DOL & Peer Review Findings
– Limited scope audits: The financial statement
disclosures addressing information certified by the
trustee incorrectly included noninvestment information,
which should have been subjected to audit procedures
or improperly excluded information that was certified
(for example – contributions receivable).
– Health and welfare plans: The benefit obligations
exceed the net assets of the plan, but the footnotes do
not disclose the method of funding this deficit.
– the assumed health care cost-trend rates used to
measure the expected cost of benefits covered by the
plan for the next year.
– the effect of a one percentage point increase in the
assumed health care cost-trend rates for each future
year on the postretirement benefit obligation.
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Common Audit Deficiencies
DOL & Peer Review Findings
Other deficiencies
• The schedule of assets (held at end of year) did
not properly identify partys-in-interest to the plan
in column (a) as required by the DOL's Rules and
Regulations for Reporting and Disclosure under
ERISA.
• The schedule of assets (held at end of year)
improperly excluded participant loans.
• The maturity date and rate of interest related to
participant loans was not disclosed in the
schedule of assets (held at end of year).
• The schedule of assets (held at end of year) did
not include cost information for investments that
are nonparticipant directed.
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Common Audit Deficiencies
DOL & Peer Review Findings
Investments
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Failure to test end of year market values
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Failure to obtain proper certification for limited
scope
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Inadequate or missing disclosures
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Stable Value Funds not properly recorded
(GIC’s)
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Failure to obtain confirmation from the
appropriate party
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Common Audit Deficiencies
DOL & Peer Review Findings
Contributions
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Failure to test payroll (payroll register, elective
deferral, authorizations, etc.)
Inappropriate reliance on SAS 70 report
Timeliness of participant contributions not
tested
Definition of compensation
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Common Audit Deficiencies
DOL & Peer Review Findings
Benefit Payments
A.
Failure to test participant eligibility to receive
benefit payments
B.
Inappropriate reliance on SAS 70 report
C.
Failure to test approval of benefit payments
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Common Audit Deficiencies
DOL & Peer Review Findings
Related Party/Prohibited Transactions
A.
No related parties noted in workpapers
B.
Lack of understanding as to what are
prohibited transactions
C.
Parties-in-interest, not N/A
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Sponsor is a party-in interest/meets
exception
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Industry Update
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Current recession began in December 2007
Longest recession since the end of WWII
Consumer savings rate was .5% negative in 2005
First time a negative savings rate occurred for an
entire year since 1932-33
Uncertainty over health care reform
DB plans facing sizable funding obligations
Employer commitment to retirement plans
Credit crisis
Volatile markets
Baby boomers
Liquidity concerns
Fraud considerations
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Regulatory Update
• Pension Protection Act of 2006 effective for 2009
– Impacts qualified plans and 403(b)’s
– Numerous plan amendments and number of
optional amendments
– Generally, plans must be amended on or
before the last day of plan year beginning on
or after January 1, 2009
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Regulatory Update
PPA (Cont.)
• Effective in 2007, change in vesting of employer
contributions – 3 year cliff or 6 year graded
• Makes permanent a number of EGTRRA
provisions, including increased contribution limits,
faster vesting, catch-up contribution and Roth
contributions
• Effective in 2007, quarterly benefits statements
for participant-directed DC plans, annual
statements for others, every three years for DB
Plans
• Effective in 2008, new annuity rules for DB and
money purchase plans – participants must be
offered a new “qualified optional survivor
annuity"
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Regulatory Update
PPA (Cont.)
• Revised rollover and plan distribution rules
• New rules encouraging “automatic
enrollment” in 401(k) plans
• Effective in 2008, safe harbor automatic
enrollment is allowed
• Revised rules that govern employer
funding of DB plans
• Provided new rules related to funding,
withdrawal liability and disclosures for
multiemployer plans
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Regulatory Update
PPA (Cont.)
• Effective in 2010 is a new plan design – the
DB(k)
• PPA amends ERISA to require more transparency
to participants in multiemployer plans. Financial
and actuarial information must be furnished to
participants upon written request
• New DOL safe harbor guidelines for fiduciaries
who invest the assets of participants in “qualified
default investment alternatives” in the absence of
participant investment direction
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Regulatory Update
PPA (Cont.)
• Provides for a new prohibited transaction
exemption for investment advice from a
fiduciary advisor to DC plan participants
under an “eligible investment advice
arrangement”
• A proposal of simplified annual reporting
requirements for plans with fewer than 25
participants – Form 5500-SF
• Electronic filing of the Form 5500
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Regulatory Update
Field Assistance Bulletin (“FAB”) 2009-02
Issued July 20, 2009
Provides guidance to DOL Field Offices
Provides Enforcement Relief for Form 5500 filings for
403(b) plans
– Does NOT provide audit relief
DOL/EBSA will not reject a 403(b) plan Form 5500 filing
solely because the auditor’s report is qualified, adverse
or disclaims an opinion (other than a “limited scope”
disclaimer allowed under 29 CFR 2520.103-8) due to the
exclusion of pre-2009 annuity contracts and/or custodial
accounts meeting 4 criteria
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Regulatory Update
• Expanded business associate liability (civil
and criminal penalties) under Technology
for Economic and Clinical Health Act
(HITECH Act) for violations of HIPAA
• COBRA premium subsidy – former
employees pay 35% of average cost of
insurance from 2/17/09 thru 2/28/10.
Employer gets 65% payroll tax credit.
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Regulatory Update
• DOL guidance on timeliness of remittance
of participant contributions
– Safe harbor for small plans – 7 days
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AICPA EBPAQC Testimony Before DOL
Advisory Council on EBP’s
• Discontinue limited-scope audit exemption
• Regulatory reporting or agreed-upon
procedures for 403(b) plans
• Evaluate cost/benefit of audits for singleemployer DB H&W plans or consider
agreed-upon procedures
• Apply agreed-upon procedures at the
participant account level for defined
contribution plans
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AICPA EBPAQC Testimony Before DOL
Advisory Council on EBP’s (cont.)
• Audit of 5500 and related schedules would
not provide any additional participant
protection
• New reporting model for ERISA plans
(except 403(b)) plans not necessary
• Continue to follow generally accepted
auditing standards (GAAS) for FS audits of
ERISA plans
• Piecemeal audit opinions should not be
allowed
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AICPA EBPAQC Testimony Before DOL
Advisory Council on EBP’s (cont.)
• Engagements to review or audit a plan’s
compliance with laws and regulations,
plan operations or governance would
require DOL regulations and should
consider cost/benefit
• Peer reviews and additional minimum
qualifications should be required for all
ERISA audit firms
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Resources
AICPA Employee Benefit Plan
Audit Quality Center
• Over 1,900 firm members
–All 50 states and territories
– 88% of the Firms have fewer than 50
CPA’s
– 90% of the Firms audit 50 or less plans
http:/www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality
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Resources
AICPA EBPAQC
• EBPAQC News Alerts – accounting, auditing and
regulatory developments; tools and resources;
upcoming live forum and other CPE events
• EBPAQC Plan Advisories – documents for auditors
to share with clients regarding information to
help plan sponsors, administrators, and trustees
in understanding their fiduciary and other
responsibilities
• EBPAQC Primers – non-authoritative practice
tools developed by the Center to assist member
firms in preparing staff for the audits they
perform
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Resources
AICPA EBPAQC
• Online Resource Center
– 403(b) Plans
– Audit Documentation
– Auditor Independence
– Plan Investments/ FAS 157
– Defined benefit plans
– Health and welfare plans
– Limited scope audits
– Form 11-K plan audits
– SAS 115 and 112
– Pension Protection Act of 2006
– Plan Sponsors
– Marketing Toolkit
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Resources
AICPA EBPAQC
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New 403(b) Tools
– Questions to Expect from Your Plan Auditor
– Sample Auditor Request List for Plan Information
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FAS 157 Tools
– Illustrative Disclosures
– Plan Sponsor FAQ’s
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Limited Scope Primer
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Employee Benefit Plans DOL Criminal Enforcement Cases
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Examples of Internal Control Communications for Employee Benefit Plans
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Statement on Accounting Standards No. 115 Tools
– A Comparison with Statement on Auditing Standards No. 112
– Summary of the Requirements
– Frequently Asked Questions
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Authoritative Accounting and Reporting Standards for Employee Benefit
Plans: FASB Accounting Standards CodificationTM
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Resources
AICPA EBPAQC
EBPAQC resources available now to help in
understanding FAS 157 & alternative
investments:
Getting started: Applying New Accounting Rules
for Measuring and Reporting Fair Value of
Plan Investments
EBPAQC Alternative Investments in Employee
Benefit Plan Primer
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Resources for Auditors – AICPA EBPAQC
Online Forum
 Over 2,900 participants
 Over 1,700 topics
7 forums
– Audit
– FAS 157 Implementation
– 403(b) Plan Audits
– Tax and Compliance
– Multiemployer plan
– Form 5500
– Form 11-k
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DOL Regulatory Resources
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The Department of Labor provides numerous resources for employee
benefit plan auditors and Form 5500 and financial statement preparers, as
well as individuals who select auditors.
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The DOL's Employee Benefits Security Administration (EBSA) protects the
integrity of pensions, health plans, and other employee benefits for more
than 150 million people. Its mission is to:
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Deter and correct violations of the relevant statutes through strong
administrative, civil and criminal enforcement efforts to ensure workers receive
promised benefits
Develop policies and regulations that encourage the growth of employmentbased benefits
Assist workers in getting the information they need to exercise their benefit
rights
Assist plan officials to understand the requirements of the relevant statutes in
order to meet their legal responsibilities
The public may reach EBSA on its toll-free participant assistance
number, 1-866-444-EBSA (3272); EFAST help line: 1-866-463-3278; and
via its‘ Web-site.
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DOL Regulatory Resources
• FAQ’s – pension and retirement information for
consumers, compliance assistance, voluntary
corrections program, reporting and disclosure
• Consumer Information
• Laws and Regulations – proposed and final rules,
public comments
• Technical Guidance – advisory opinions,
exemptions, field assistance bulletins, information
letters, interpretive bulletins, Executive Order
12866
• Compliance Assistance – abandoned plans,
correction programs, fiduciary education, health
plans, retirement plans, small employers,
reporting and filing, 403(b) plans, webcasts
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Example Public Comment to Laws & Regs
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-----Original Message----From: [email protected]
Sent: Tuesday, October 24, 2006 1:14 PM
To: EBSA, E-ORI - EBSA
Subject: independance of accountant RFI
As a member of a local union I have been deeply concerned
about our accountant's ability to be objective and subjective with
particular concern to our pension plan. I have recently talked to
him in regards to problems I saw in our locals 5500 filing. He was
evasive and defensive to my questions.
He also is our accountant for our general fund's LMRDA reporting
requirements, and possibly for our building corporation and other
funds.
There are substantial sums of money being paid to his firm, and I
for one would expect the term independent to mean that there is
absolutely no business relationship at all with an independent
accountant. This accountant seems to have a cozy relationship
with my business manager and is probably advising him how to
embezzle funds from our membership.
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EFAST-2 (Electronic Filing)
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All pension plans, welfare plans and direct filing entities (DFEs)
subject to ERISA must file electronically for plan years
commencing on or after Januaary 1, 2009
An individual (e.g., officer of an employer, preparer) may register
for electronic credentials on January 1, 2010. The following types
of electronic credentials are available: (1) filing author, (2) filing
signer, (3) schedule author, (4) transmitter, and (5) third party
software developer. A filing author prepares a 5500 under IFILE. A
preparer using third party software does not need filing author
credentials. A filing signer has an obligation to review the 5500
and the signature indicates a belief that the submission is true,
correct and complete. The employer continues to be responsible
for the timeliness of the filing.
Schedule SSA is no longer part of the 5500 filing. Commencing
with the 2009 plan year, Schedule SSA becomes Form SSA and an
employer will file the form on paper directly with the IRS.
An employer no longer attaches the Form 5558 to a filing.
However, the employer continues to use the form to obtain an
extension to file.
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Electronic Filing
How does the Form 5500 filer include the auditor's report
and audited financial statements with the Form 5500
filing?
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The auditor's report and audited financial statements must be
submitted in a searchable PDF file.
No encryption or password protection is allowed.
Submitting an encrypted auditor report to your client will result in
the Form 5500 being rejected by the EFAST2 system.
Using software that you can save or print the document as a PDF
file will be the best option. Text format is also acceptable.
Scanning the document is allowed however, this may result in a
large file that is not searchable or attachable to the filing.
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Electronic Filing
How does my client file for an
extension?
• Extensions must be filed in paper format
as they are mailed to the Internal
Revenue Service.
• The extension is no longer required to be
attached to the Form 5500 filing, but a
copy of the extension should remain on
file.
• Extensions are required to be filed by the
Form 5500 due date.
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Electronic Filing
Does the plan auditor need to register
for EFAST2 credentials?
• If your firm is only preparing audit reports
for your clients you do not need to
register with the EFAST 2.
• However, if you will be preparing any
Form 5500s, you will probably need to
register for filing credentials prior to the
actual filing
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Electronic Filing
• Most parties assisting in the filing of the
Form 5500 must register for EFAST 2
credentials.
• This would include anyone preparing the
Form 5500 through IFile, signing the Form
5500, attaching a schedule through IFile,
or transmitting the Form 5500 as a third
party.
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Auditing and Financial Reporting
Overview for Employee Benefit
Plans
Questions?