“Seeing Beyond the Numbers…”
Participant Data Testing
Diane Wasser, CPAPartner-In-Charge, Pension
Services GroupAmper, Politziner & Mattia, LLP
Participant Data TestingParticipant Data Testing
• The objectives of auditing procedures applied to participant data are to provide the auditor with a reasonable basis for concluding whether:– all covered employees have been properly
included in employee eligibility records and contribution reports
– accurate participant data for eligible employees was supplied to the plan administrator (and actuary)
Participant Data TestingParticipant Data Testing
• Types of data tested, in general:– Demographic data– Payroll data (wage rate, hours worked, earnings)– Contributions (employee and employer)– Benefit data for those receiving benefits (benefit
levels, benefit options and benefit elections)– Enrollment elections and claims data – H&W
• Start by reviewing the plan document to determine what participant data to test and the objectives of the test
• Inquire early in planning of any plan amendments!
Participant Data TestingParticipant Data Testing
• Testing of the participant accounts is the same in limited scope and full scope audits– The allocation of investment income to individual
accounts is not certified
• Material transaction class – Generally encompasses payroll and personnel
information, contributions, participant account activity, fund allocations, and distributions
Participant Data TestingParticipant Data Testing
• The objective of auditing procedures applied to individual participant accounts of defined contribution plans is to provide the auditor with a reasonable basis for concluding whether:– Net assets have been allocated to the individual
participant accounts in accordance with the plan instrument
– The sum of the participant accounts reconciles with the total net assets available for plan benefits
– Participant transactions are authorized and have been executed at the proper amount in the proper period
Participant Data TestingParticipant Data Testing
• In a defined benefit plan audit, auditors should satisfy themselves that the participant data provided to and used by the actuary are accurate and complete in all material respects
• The objective of auditing procedures applied to accumulated plan benefits is to provide the auditor with a reasonable basis for concluding whether the actuarial present value of accumulated plan benefits, components of those benefits, and amounts of changes in the actuarial present value of accumulated plan benefits are presented in conformity with FASB 35 (FASB ASC 960)
Participant Data TestingParticipant Data Testing
• Contributions to a defined benefit plan ordinarily are determined on the basis of an actuarial valuation of the plan carried out by the plan actuary, using participant data received from the plan administrator and using actuarial techniques.
• Auditors should:– Obtain an understanding of the methods and assumptions
used by the actuary– Obtain satisfaction regarding the professional
qualifications of the actuary and relationships that may impair objectivity
– Make appropriate tests of data provided to the specialist, taking into account the auditor’s assessment of control risk and
– Evaluate whether the specialist’s findings support the related assertions in the financial statements.
Participant Data TestingParticipant Data Testing
• Eligibility• Contributions • Census • Distributions• Vesting• Income allocations
– Investment income has several components, net appreciation is typically not allocated yet is derived based on the end of day pricing of investments, interest and dividends is typically allocated
• Fund allocations• Expense allocations• Forfeiture allocations• Loans • Rollovers• Transfers/Plan mergers
Participant Data TestingParticipant Data Testing• Errors are important!
– Non compliance with the plan document is an operational defect that can cause plan disqualification
• Careful assessment of materiality at the participant level is imperative
• Qualitative aspects of materiality– Participant contribution errors (i.e. Incorrect compensation
base)
• Could be systematic and impact many participants over many years• Making participants whole• Operational errors– Impact on tax exempt status
Contribution TestContribution Test
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
• Test employee deferrals and employer contributions for a sample of participants– Employee deferral is the amount withheld from an
employee’s pay, must audit employee elections of desired deferral %• Assure the amount withheld is per the participants’ direction
and calculated based on the compensation as defined in the plan document
– Paperless considerations• Consider confirmation
– Verify salary to payroll information or W-2
Contribution TestContribution Test– Employer contribution is the amount contributed
by the employer , may be a matching contribution or discretionary contribution • Assure calculated in accordance with the
plan’s provisions• If based on milestones of Plan Sponsor, assure
milestones were met• Watch for plan amendments reducing or
eliminating– Assure the participant is eligible for the
contribution, could be a waiting period or last day of year employment requirement
Contribution TestContribution Test
• Eligible compensation– Plan documents specify the various aspects of
compensation (base wages, overtime and bonuses) that are considered in the calculation of plan contributions in defined contribution plans and in the determination of benefits in a defined benefit plan
– Testing payroll data includes the determination of eligible compensation for individual employees per the plan document and comparison of the definition of eligible compensation used in the daily operation of the plan
Contribution TestContribution Test
• Don’t forget payroll testing– Is the participant’s compensation what it
is supposed to be?– Outsourced – get SAS 70– In house – SAS 94; review 404 work;
review internal audit department work
EligibilityEligibility• Testing is performed to ensure eligibility requirements are
being met and participants are entering the plan at the appropriate time
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
• Typical eligibility requirements– Time requirements: Immediate, One Month, Three Months,
One Year– Hour requirements: One hour, 1,000 hours– Possible combination of time and hour requirement– Eligibility may differ between employee and employer
contributions– Entry dates: Immediate, beginning of each month,
beginning of each quarter, beginning of each year
Census TestCensus Test
• Test demographic data– Sex, marital status, birth date, date of hire, union
status, department, etc.• Determine if information on the participant
statements or actuary census is consistent with information in the personnel files
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
Census TestCensus Test
• Verify demographic data– I-9 form– Pension plan enrollment form– Employment application– Insurance information
• Verify salary to payroll information or W-2• In a defined benefit plan audit, watch the
date of the actuarial census (beginning of year or end of year) and be sure testing includes information for the proper date
Distributions/Benefit Distributions/Benefit PaymentsPayments
• Objectives– To provide a reasonable basis for
concluding whether:• payments are in accordance with plan
provisions• payments are made to those entitled
to them• transactions are recorded in the
proper account, amount, and period
Distributions/Benefit Distributions/Benefit PaymentsPayments
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
• Trace to supporting documentation (benefit election/request form, approval form, cancelled check, wire confirmation)
• Recalculate distribution amount (trace to actuarial determination of benefit)
• Consider confirmation• Determine remaining balance is $0• Determine eligibility for the distribution (death
certificate)• Recalculate vesting• Determine continued eligibility for payment
Participant Data/Allocation Participant Data/Allocation TestingTesting
• One of the objectives of auditing procedures applied to individual participant accounts of a defined contribution plan is to provide the auditor with a reasonable basis for concluding whether net assets and transactions have been properly allocated to participant accounts in accordance with the plan documents
Participant Data/Allocation Participant Data/Allocation TestingTesting
• Interest and dividends• Appreciation/depreciation• Fund allocation• Expenses• Forfeitures• Transfers and mergers
Participant Data/Allocation Participant Data/Allocation TestingTesting
• Interest and dividends– Are allocated among participants, should be reasonable based on
overall plan level calculation• Appreciation/depreciation
– Driven by NAV/stock prices etc.• Fund allocation
– Consider confirmation– Request information from the record keeper
• Expenses• Forfeitures• Transfers and mergers
– Don’t ignore
Participant Data/Allocation Participant Data/Allocation TestingTesting
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
• Substandard audit procedures
LoansLoans• Read the plan’s loan policy
• Sometimes a separate document from the plan document
• Review loan listing• Tie loan listing to financial statements• Review listing for consistent/inconsistent
payment activity• Review delinquency reports
LoansLoans• Select loans to test:
– Rate of interest is in accordance with the plan’s loan provisions
– Vesting and loan limits at time of origination • Cannot exceed 50% of participants’ vested balance or
$50,000
– Repayments are being made
• Consider reliance on SAS 70 to reduce (not eliminate) procedures
RolloversRollovers
• Don’t forget about them• If material consider specific procedures• Perhaps analytical procedures
Plan MergersPlan Mergers
• Amounts merged into a plan can be material and should not be ignored
• Consider whether the amounts transferred in were properly allocated to participant accounts in the receiving plan
• Assure the amount transferred out was properly received
Plan TerminationsPlan Terminations
• In the current economy, there is an increase in plan terminations and perhaps partial terminations
• Watch vesting of affected participants in partial terminations
• Consider audit approach changes– No contributions– No new participants becoming eligible– No changes to census– Material distributions
Participant TestingParticipant Testing
• In summary, participant testing is an integral part of an employee benefit plan audit
• The activity generally constitutes a material transaction class
Participant TestingParticipant Testing
• Participant elections drive the contributions, determine where the contributions are invested, which drives the plan earnings activity, and drive distributions
• In a defined benefit plan, the information used by the actuary in the census determine the contributions required to ultimately fulfill the benefit obligations and to determine the amounts ultimately distributed
“The material contained in this presentation is for general information and should not be acted upon
without prior professional consultation.”
Diane Wasser(908) 218-5002