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Participant Data Testing Diane Wasser, CPA Partner-In-Charge, Pension Services Group Amper, Politziner & Mattia, LLP Participant Data Testing The objectives of auditing procedures applied to participant data are to provide the auditor with a reasonable basis for concluding whether:

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Participant Data Testing

Diane Wasser, CPA

Partner-In-Charge, Pension Services Group

Amper, Politziner & Mattia, LLP


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Participant 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)


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Participant 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!


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Participant 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


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Participant 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


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Participant 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)


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Participant 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.


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Participant 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


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Participant 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


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Contribution 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


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Contribution 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


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Contribution 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


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Contribution 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


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Eligibility

  • 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


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Census 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


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Census 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


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Distributions/Benefit Payments

  • 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


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Distributions/Benefit Payments

  • 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


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Participant Data/Allocation Testing

  • 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


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Participant Data/Allocation Testing

  • Interest and dividends

  • Appreciation/depreciation

  • Fund allocation

  • Expenses

  • Forfeitures

  • Transfers and mergers


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Participant Data/Allocation Testing

  • 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


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Participant Data/Allocation Testing

  • Consider reliance on SAS 70 to reduce (not eliminate) procedures

  • Substandard audit procedures


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Loans

  • 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


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    Loans

    • 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


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    Rollovers

    • Don’t forget about them

    • If material consider specific procedures

    • Perhaps analytical procedures


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    Plan 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


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    Plan 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


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    Participant Testing

    • In summary, participant testing is an integral part of an employee benefit plan audit

    • The activity generally constitutes a material transaction class


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    Participant 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


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    “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

    [email protected]


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