Navigating an Employee Retirement Income Security Act (ERISA) 103(a)(3)(C) audit can be challenging, especially for plan sponsors who have never undergone a plan audit before.  However, with proper preparation and understanding, the process can be streamlined and manageable. This comprehensive guide will provide you with an overview of the process and what is required from you as the plan sponsor.

WHAT IS AN ERISA 103(A)(3)(C) AUDIT?

An ERISA 103(a)(3)(C) audit, previously referred to as a limited-scope audit, is conducted on employee benefit plans that hold investments in assets like mutual funds, collective trusts, or insurance contracts. These plans must also meet the requirements for a plan audit based on the number of participants with balances as of the first day of the plan year. These assets are typically certified by a qualified institution, allowing the auditor to limit the scope of the audit regarding these investments. Another important item to note is that the audit requirements are driven by a plan’s participant balance at the beginning of the year.

WHY IS THE AUDIT NECESSARY?

Compliance with ERISA is mandatory for most employee benefit plans. An ERISA 103(a)(3)(C) audit ensures that your plan adheres to regulatory standards, safeguarding the interests of plan participants and beneficiaries. Failure to comply can result in penalties, making the audit an essential part of plan management.  The plan sponsor has a fiduciary responsibility to the plan and the plan participants, so adequately preparing for the audit and ensuring all information is properly maintained and documented is of the utmost importance.

STEPS TO PREPARE FOR AN ERISA 103(A)(3)(C) AUDIT

UNDERSTAND THE SCOPE & REQUIREMENTS

Familiarizing yourself with the scope and requirements of an ERISA 103(a)(3)(C) audit sets the groundwork for a successful audit. Consult with your auditor to understand which areas will be examined, including plan contributions, distributions, participant data, and administrative processes.

ASSEMBLE A DEDICATED TEAM

Form a team responsible for managing the audit process. This team should include individuals from various departments such as HR, finance, and payroll. Using the preliminary audit request list, assign clear roles and responsibilities among team members.  Additionally, making an introduction between your auditor and your plan providers (Trustee/Custodian/TPA) can help create efficiencies in the audit process by allowing direct communication from the auditors to key individuals.

GATHER NECESSARY DOCUMENTATION

Collect all relevant documents and records required for the audit. These may include:

• Plan documents and amendments
• Summary plan descriptions (SPDs)
• Trust agreements
• Contribution records
• Distribution and loan records
• Participant data
• Investment statements certified by the qualified institution

Having these documents organized and readily available will facilitate a smoother audit process.

REVIEW & DOCUMENT INTERNAL CONTROLS

Properly designed internal control procedures are critical in preventing errors and fraud. Review processes related to contributions, distributions, and participant data management to identify and rectify any weaknesses.  As a best practice, internal controls should be documented  and periodically reviewed and updated to ensure the documentation is up to date.

COMMUNICATE WITH YOUR AUDITOR

Create open lines of communication with your auditor prior to the beginning of the engagement and throughout the audit process.  Ensure you understand the information being requested and communicate any issues early in the process.  Clear communication creates alignment between you and your auditor and can prevent misunderstandings and assist in facilitating an efficient audit.

CONDUCT A SELF-AUDIT

As you prepare information to provide to the audit team, consider performing a self-audit to identify potential issues before the official audit begins. This proactive approach allows you to address any discrepancies or non-compliance issues in advance and communicate them to the audit team prior to testing.  This will assist in timely correction of any issues.

REVIEW REPORTING FROM YOUR PLAN PROVIDERS

Ensure that you are reviewing the reports that come from your plan providers.  Management has a responsibility during an ERISA 103(a)(3)(c) audit to assess the certification statement provided.  Along with this, management should be reviewing the additional reports and reconciling with internal reporting to ensure accuracy.  Additionally, management should review the Service Organization Control (SOC 1) reports to identify any potential issues with the plan providers that may have occurred during the year that could impact the reliability of data.

USE TECHNOLOGY TO YOUR ADVANTAGE

Leverage technology to streamline the audit preparation process. Utilize software solutions for document management, data collection, and communication. Technology can enhance efficiency and accuracy, making the audit process less cumbersome.  Utilize you audit firm’s electronic document request list and file transfer portals to provide requested information.

PREPARE FOR ON-SITE VISITS

If the audit requires on-site visits, ensure your team is prepared in advance.  Verifying that the requested information is available to the auditors will streamline the process.  Additionally, ensuring key individuals have availability to meet and discuss audit items during the on-site visit will help to streamline the overall process.

REVIEW THE AUDIT REPORT

At the completion of the audit, carefully review the audit report and the financial statements to ensure the information reconciles back to the reporting provided.  Additionally, review the Form 5500 filing to ensure management understands any reconciling items between the Form 5500 and the financial statements.  If the auditor has any findings or recommendations, develop a corrective action plan to address these items for the next plan year to ensure ongoing compliance. Use the audit as an opportunity to improve your plan’s administration and internal controls.

MERCADIEN: A TRUSTED PARTNER FOR EMPLOYEE BENEFIT PLAN AUDITS

Preparing for an ERISA 103(a)(3)(C) audit may seem overwhelming, especially for plans undergoing an audit for the first time. However, with thorough preparation, understanding of requirements, and effective communication, the process can be manageable and even beneficial.

Mercadien’s Employee Benefit Plan Audit Group has extensive experience with plans of all sizes and structures, including 401(k) and 403(b) plans, and we have worked closely with our clients to help navigate various changes over the years. Contact us today to learn more about how we can assist you and your organization with this transition and discuss how we can provide support with other audit and compliance matters related to your plan.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.