An employee benefits broker facilitates insurance renewals and purchases of employee benefit plans. The broker’s role is transactional and typically focused on negotiating the costs and benefits of the current year’s plans. Show
To understand a broker’s motivation, businesses must consider who pays brokers and the factors that influence how much brokers earn. Brokers typically are paid through commissions from insurance companies. Commission amounts are tied to the rates and volume of business with an insurance company — as the rates and volumes increase, so too does the broker’s compensation. To understand a broker’s motivation, businesses must consider who pays brokers and the factors that influence how much brokers earn. Insurance companies are also eager to retain business and may offer additional incentives to brokers that deliver renewals and bring more business into a particular insurance company. This means that while a broker negotiates rates on a client’s behalf, they have a financial incentive to keep the rates higher. In effect, they’re working for the insurance companies that pay them, not for the businesses that they serve. Because of the financial incentive structure, brokers may also be less interested in exploring alternative funding arrangements and cost containment initiatives. In fact, many brokers never develop the expertise or skill sets to do so, nor are they interested in true cost containment. Because cost containment may mitigate rate increases, it could reduce future commissions and threaten the broker’s compensation. While some brokers may suggest that an employer can save money by changing deductibles or copay structures, these actions are merely cost-shifting tactics, not cost-containment strategies. Because brokers have a transactional role focused on the annual renewal of benefit plans, employers must react annually to the renewal options presented. Employers’ options are typically limited to requesting that the broker negotiate more strenuously on their behalf or shop for an alternative plan. Changing plans can be disruptive and time-consuming for an organization, and while it may buy a year of more favorable rates, it’s likely that next year, the employer will be in the same reactive mode, once again facing limited renewal options presented by the broker. A benefits advisor provides expert employee benefits consulting and supportAn employee benefits advisor offers strategic consulting services for their clients along with facilitating the procurement process and transactions required to offer employee benefit programs. Advisors work for the employers that hire them on a fee-for-service basis. Their compensation is tied to the services they provide to their clients, not to commissions or incentives from insurance companies. An advisor is incented to deliver value to the client in the form of the professional services promised in the engagement agreement. An advisor’s fees are transparent and increase per an agreed-upon schedule with the employer/client. Advisors work for the employers that hire them on a fee-for-service basis. Advisors not only understand the benefits marketplace, but they also offer creative and thoughtful strategies and solutions. They work with employers to set a longer-term benefit strategy that looks beyond just the current year’s needs and aligns with each business’ total rewards strategy. An advisor educates leadership on ideas, strategies, and tactics to support the overall employee benefits strategy and makes recommendations accordingly. Employee benefits advisors leverage data, expertise, and the power of choice to bring transparency and cost containment opportunities to their clients. Some programs, including efficient funding arrangements and cost containment programs, are only available to certain high-performing advisors because of their commitment to transparency, cost containment, and long-term strategies. A midsized employer that engages an advisor can therefore expect their plans to perform better than the marketplace. In many cases, these benefits solutions will also provide better returns in recruitment and retention and set employers apart from their competition — not only in cost but also in employee experience. If you’re interested in discussing how you can move from a reactive and transitional employee benefits experience to a strategic, high-performing offering with benefits advisors who will work for you, we’d love to chat further. Plante Moran Group Benefit Advisors (PMGBA) is an affiliate of Plante Moran that provides independent health and welfare benefit consulting services. PMGBA delivers customized solutions and cost-effective strategies to meet the unique needs of our clients and their employees.
The Employee Retirement Income Security Act (ERISA) is a federal law that applies to most private employers and establishes standards for health, retirement and other welfare benefit plans in order to protect both employees and employers. ERISA applies to any private entity that offers benefit plans that fall under their scope of authority. This legislation requires that employers comply with specific standards, one of which includes an employee benefit plan audit requirement. Enter: employee benefit plan audits. An audit of an employee benefit plan (EBP) involves the examination of financial statements provided by a third party to the DOL, plan management and plan participants. Going through an EBP audit can be a daunting process, especially if you’re going through the process for the first time.
To fully grasp the importance of an EBP audit, it’s wise to examine what EBP audits entail and the ultimate objective of these audits. What is an EBP Audit?The term “employee benefit plan” refers to a pension, 401(k) or profit-sharing plan, and the primary aim of an EBP audit is to accurately gauge the ability of the EBP to cover current and future benefits and payments. In short, it assesses the viability of your plan. An audit of an EBP must employ the Generally Accepted Audit Standards (GAAS) and adhere to Department of Labor (DOL) and ERISA regulations. In addition, the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board (ASB) establishes the standard for an EBP audit, and the Professional Ethics Executive Committee administers independent ethical standards. An EBP audit can be a complex undertaking. The plan’s financial reporting and the audit environment both provide unique factors in an EBP audit and can make this process much more complex than a standard audit. These unique factors may include:
What happens during an EBP audit?During an EBP audit, your engaged audit firm examines whether the financial statements contain any material misstatements that may result from fraudulent reporting or due to unintentional errors. The findings from the audit provide the basis on which the auditor reports on the financial statements concerning the EBP. Audit procedures seek to:
In addition to these aims, the DOL looks to the auditor to provide their judgment on the accuracy and material fairness of information submitted as part of the Form 5500. This process also includes highlighting areas of weakness or operational errors which can be addressed to enhance the operations of the EBP. Lastly, an EBP audit assists the sponsor of the EBP in carrying out the legal requirement to file the Form 5500. Who is involved in an organization’s EBP audit?In general, the plan sponsor’s human resources and financial accounting departments, an actuary (for defined benefit and/or HW plans), a third-party administrator, ERISA legal counsel, investment trustees and administrators, as well as an independent auditor, may all play a significant role in this process, as applicable. What is the objective and importance of an EBP audit?The primary objective of ERISA is to protect participants and their benefits in an EBP. ERISA helps to look out for employees by ensuring that EBPs abide by guidelines that prevent any misuse of plan assets on the part of the administrators of the employee benefit plan. Hiring an independent certified public accountant (CPA) to audit your financial statements to ensure your plan is adhering to relevant legislation is standard practice when your plan reaches certain-participant-count thresholds. The audit of the financial statements of an employee benefit plan is essentially a safeguard. It is meant to protect the financial integrity of the plan to provide health, retirement and other associated benefits of the plan to participants over the term of payments. However, the benefits of an EBP audit don’t stop there. Revelations from an audit can also assist your company in streamlining and making the operations of the plan more efficient. With audit results in hand, you’ll be able to more accurately evaluate the strengths (or weaknesses) of the internal controls involved in financial reporting. The conclusion of the audit reinforces that your plan will have the funds available to pay benefits to respective participants when these benefits become due. With multiple stakeholders who are part of the financial reporting process, this becomes necessary to determine accuracy. Companies also benefit from pinpointing areas of weakness or operational errors and with assistance in carrying out the legal requirements of Form 5500. The regulations, therefore, can be viewed as a chance to strengthen your internal processes and prove viability of your plan.
You may be wondering if an EBP is even required of the plan you provide. Determining the answer can, at times, be complex without some guidance. Let’s review some basic high-level principles for audit requirements. How do you determine if an audit is required for your employee benefit plan?One key determiner is the size of your plan. Employee Retirement Income Security Act (ERISA) guidelines generally require employee benefit plans with 120 or more eligible participants at the beginning of the plan year to have an audit of the plan’s financial statements. So, if your EBP consists of fewer than 120 eligible participants at the start of the plan year and you file as a Small Plan (Schedule 1) for your Form 5500, you do not require an audit. However, if you file as a Large Plan (the accompanying Schedule H) with more than 100 eligible participants, you will require an audit. While this is the general rule, there are other important factors to consider, as well as other exceptions relative to health and welfare plans depending on whether the plan is considered funded or non-funded. You should be aware of a few exceptions: 1. 80-120 Rule 2. Short Plan Year Rule What is an eligible participant?Importantly, you’ll need to be crystal clear on how many plan participants you have. But this isn’t as easy as it sounds. Determining who qualifies as an eligible participant may not be as straightforward as you first think. An eligible participant includes:
You can see there are a lot of exceptions and/or rules which may trigger the audit requirement. This is why is it critical to discuss all of these scenarios with your third-party administrator (TPA) and/or accountant to ascertain whether an audit is required.
Once you have determined eligibility, the next step is to consider all of the detailed reporting requirements as well as selecting an audit firm. We’ve all heard the old adage “an ounce of prevention is worth a pound of cure.” This is especially true when it comes to employee benefit plan (EBP) audits. A successful employee benefit plan audit requires you to prepare ahead of time to ensure the process moves smoothly and minimizes time and cost for all parties involved. Here are a few ways you can ensure the process proceeds as smoothly as possible. Organize Your Documents (EBP Audit Requirements Checklist)Provision and organization of plan-related documents must come first. To get prepared, make sure that your plan-related documents are current, organized and easily accessible. This applies to not only your independent audit but also to your 401(k) plan if it is selected to be audited by the DOL. Below, we’ve provided a checklist of important documentation and statements needed to effectively complete the audit. Many of these items can be provided by the third-party administrator and/or the plan’s investment custodian. In addition, the company itself must provide copies of reports from both payroll and human resources that relate to the plan participants, such as those showing employer contributions, process narratives and participant loan details and support:
All of the above-mentioned documentation and support are needed to effectively perform the EBP audit. Familiarize Yourself with Your Fiduciary ResponsibilityCareful attention to an employee benefit plan and effective fiduciary policy and oversight demonstrate that responsible controls are in place. Plan sponsors must understand that there are associated risks in being a fiduciary and that they could be liable for any breach in their responsibilities. Understand Operational CompliancePlan documents specifications should dictate how an employee benefit plan is operating. If there are compliance issues, they must be addressed so that the plan can be brought into compliance with the DOL and IRS regulations. Some of the more common examples of noncompliance include:
Review Your Internal ControlsOften, smaller businesses struggle to prioritize controls. It’s not uncommon for sponsors to believe that if an outside recordkeeper and custodian handle their employee benefit plan, then fraud or errors are unlikely to occur. But there is always the possibility of fraud to occur. For this reason, many TPAs produce a System and Organization Controls Report (SOC 1) that details the control structure in place. Choose the Right Auditor for Your CompanySome of the most important considerations in selecting your auditor include competence, adherence to standards, familiarity with required procedures and DOL guidance. Here’s a closer look at each of these standards:
In addition, the DOL suggests that the plan administrator should ask the auditor specifically about the importance of an audit engagement letter, the scope of the audit and what steps occur at the end of the audit.
This comprehensive review from the third-party auditor occurs in three phases: (1) providing your requirements, (2) fieldwork and (3) audit results, reports and financial statements. Phase 1: Providing RequirementsThe first step is to provide your auditor with the documentation and requirements needed to complete the audit. Companies should pay particular attention to the completeness and detail of the information provided to the auditors to avoid issues and to minimize potential further investigation by the Department of Labor (DOL). Phase 2: FieldworkWhile on-site or remotely, the auditor will meet with company personnel responsible for the EBP plan and gain an understanding of the internal controls, accounting processes and risks. You should expect an auditor to review a sampling of distributions, loans and employees and request the supporting files and documentation for the samples selected. In all, the fieldwork phase can take between a few days and one week. According to the AICPA, an EBP audit considers financial statements that cover the following areas:
Phase 3: ResultsFinally, once the fieldwork review of the EBP audit requirements is completed, the auditor will provide a draft of the financial statements, report and correspondence related to any internal control deficiencies uncovered during the review. Once approved, the auditor will provide the company with a finalized report and audited financial statements to be attached to the Form 5500 that is submitted to the DOL.
Because of the new ERISA guidelines for EBP audits, understanding Form 5500 is more critical now than ever before. What is Form 5500?The Form 5500 provides federal agencies with an annual report to use as a framework. Form 5500 includes information about the benefit plans that are offered by employers, as well as the finances and operations of these plans. It’s one of the most essential documents in ERISA’s disclosure and reporting framework, born from the collaboration of these three U.S. government agencies:
Is Form 5500 only for Employee Benefit Plans?The following plans are also subject to Form 5500 filings if they have 100 employees or more: medical, vision, dental or other health plan, any life insurance plan, flexible spending account, cafeteria plan, vacation, holiday, disability or any other employee benefit plan or fringe benefit plan. What are the types of Form 5500?At the start of filing your Form 5500, you first need to identify which type you need to submit. The type of Form 5500 that is needed depends on the plan. There are three main types that are used.
What Information Goes in the Form 5500?Form 5500 consists of the main form, in addition to various schedules and attachments that supplement the comprehensiveness of the main form. To complete Form 5500, details about your specific employee benefit plan must be submitted. These include the following, if applicable:
The Form 5500 encompasses areas that include: the starting date of your plan, details concerning the number of participants in the plan, plan sponsor details, details of the plan administrator, information regarding the funding of the plan and provided benefits, as well as attached schedules. Understanding which schedules you are required to submit can present a great challenge. Schedules to accompany Form 5500 may include:
An experienced EBP auditor will help you determine that all the correct schedules and required documents are submitted with your Form 5500 filing. How is Form 5500 Filed?Be aware that the DOL requires Form 5500 to be filed electronically by using the ERISA Filing Acceptance System (EFAST2) program. This system is designed to help simplify the processing, submission and receipt of your Form 5500. Who Needs to File a Form 5500?Often, a company’s finance, HR or operations department, or any combination of these departments, will prepare the Form 5500. However, it’s the administrator of an EBP who is ultimately responsible for filing the relevant Form 5500. Alternatively, a third-party administrator may be used to file Form 5500. When is Form 5500 Filed?An EBP plan must file Form 5500 before the end of seven months following the plan year-end. For example, an EBP that follows the calendar year (ending December 31), must file Form 5500 by the following July 31. What are the potential penalties for Form 5500 Issues?Take the time to carefully review your information and submit your Form 5500 by the required deadline in order to avoid penalties or delays in processing. Substantial penalties or fines may be imposed by the IRS or the DOL if you fail to file or fail to meet the filing requirements for Form 5500. These examples offer some perspective on penalties that have been assessed:
Taking into account the complex requirements, it’s easy to see how engaging with the right auditor can be a crucial difference between assurance and risk for potential negative outcomes. With that in mind, let’s explore how to effectively choose an auditor and navigate the process wisely.
Whether your plan has been audited by the same firm for 10-plus years or whether your plan has just met the initial audit threshold, we are here to help. Warren Averett is dedicated to helping clients manage their employee benefit plans with the utmost credibility and confidence. Warren Averett conducts audits for more than 300 employee benefit plans on an annual basis, which ranks in the top 1% of accounting firms. Our audits handle EBPs that range from under $1 million to in excess of $12 billion in assets for both private and public companies. Our team members are experts in auditing standards, the Securities and Exchange Commission (SEC) regulations, and the Department of Labor and Employee Retirement Income Security Act filing requirements. We are members of the AICPA Employee Benefit Plan Audit Quality Center and take pride in our stellar track record of having the DOL find zero deficiencies in our audits. Warren Averett has the expertise you need to ensure quality audits in this complex field. Contact us today and let us help you prepare for tomorrow.
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