“Seeing Beyond the Numbers…”
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:
– 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 Testing
• Types of data tested, in general:
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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 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 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 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 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 Testing
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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 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 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 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 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 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
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
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
Census Test
• Verify demographic data
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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 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
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
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
Participant Data/Allocation Testing
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Interest and dividends
Appreciation/depreciation
Fund allocation
Expenses
Forfeitures
Transfers and mergers
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
Participant Data/Allocation Testing
• Consider reliance on SAS 70 to reduce (not eliminate)
procedures
• Substandard audit procedures
Loans
• Read the plan’s loan policy
• Sometimes a separate document from the plan document
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Review loan listing
Tie loan listing to financial statements
Review listing for consistent/inconsistent payment activity
Review delinquency reports
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
Rollovers
• Don’t forget about them
• If material consider specific procedures
• Perhaps analytical procedures
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
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
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No contributions
No new participants becoming eligible
No changes to census
Material distributions
Participant Testing
• In summary, participant testing is an integral part of
an employee benefit plan audit
• The activity generally constitutes a material
transaction class
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
“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
wasser@amper.com