 Accounting
Best Practices
Employee Benefit
Plans
Are You a Plan Sponsor?
By Lynn Smith
An employer’s choice to provide various benefits to its
employees by sponsoring an employee benefit plan can be
a valuable decision providing incentives that contribute
to the overall welfare of its employees and often times
leading to increased employee satisfaction and
retention. However, employers should be aware of the
nature and complexities of their responsibilities when a
plan is put in place.
There are literally thousands of employee benefit plans
in existence sponsored by both large and small
employers. Often times, larger employers operate in a
more sophisticated environment with human resource and
accounting departments overseeing the management and
reporting of their employee benefit plan. However, small
businesses generally do not have the structure, level of
knowledge and resources available internally and often
do not realize the fiduciary responsibilities they have
related to their employee benefit plan. Further,
fiduciary responsibilities span to service providers
engaged by the plan sponsor in filling various roles
related to the plan. Regardless of your company size or
role in servicing the plan, plan fiduciaries are charged
with the overall responsibility of protecting the
interests of employees, retirees and others benefiting
under the plan.
Employee benefit plans include various types of pension
plans, including 401(k) and profit sharing plans,
defined benefit plans, employee stock ownership plans
and other health and welfare plans. Such plans must
operate within the provisions and regulations set forth
in the Employee Retirement Income Security Act of 1974 (ERISA)
and are regulated heavily by various federal agencies,
including the U.S. Department of Labor and Internal
Revenue Service.
A fiduciary of the plan is any individual or entity
involved in managing the plan and its related assets,
and generally are those parties who exercise discretion
or control over the plan’s day-to-day operations. A
fiduciary includes named trustees, investment custodians
and advisors, those serving on administrative committees
and others charged with oversight of the plan.
Frequently, third-party service providers are engaged to
handle certain administrative functions of the plan. In
these situations, there can be a misconception on behalf
of management that such third parties hold the primary
responsibility when, in reality, a high level of
fiduciary responsibility remains with the plan sponsor
and its administrator to ensure that third parties
engaged are qualified and to monitor their performance
in fulfilling their roles in the administration of the
plan.
A fiduciary’s primary role is to act prudently on behalf
of those benefiting under the plan. Other
responsibilities include having a thorough understanding
of the provisions of the plan document, ensuring the
plan document complies with the provisions of ERISA,
ensuring the plan operates within an investment policy
that provides for a reasonable diversification of
investment options, engaging qualified service
providers, as necessary, and ensuring the costs of those
services are fair and reasonable.
The plan sponsor and its related fiduciaries also have
responsibility for meeting annual reporting and other
compliance related matters. Reporting requirements
generally include overseeing the completion of a Form
5500 filed annually with the Department of Labor and,
depending on the size of the plan, engaging an outside
auditor to audit the plan’s financial statements.
Generally, a plan having 100 or more eligible
participants on the first day of the plan year is
required to file audited financial statements along with
the Form 5500. Further, there are requirements to have
certain plans tested to ensure compliance with various
nondiscrimination rules. Not having an audit and not
testing are the two most common problems we see.
Responsibility for the preparation of the plan’s
financial statements rests with the management of the
Plan. Historically, many plan sponsors have relied on
the expertise of outside parties, generally third-party
administrators or plan auditors, for the preparation of
the plan’s financial statements. However, recent
guidance has made clear that management must demonstrate
its ability to prepare the plan’s financial statements,
and any inability to demonstrate this is a possible
indication of a weakness in the plan’s internal control
environment.
It is important for those involved in a fiduciary
capacity that they understand the responsibilities and
liability that goes along with this role. Fiduciaries
can be held personally liable for a breach of
responsibility resulting from their actions or those of
other fiduciaries to the plan (the U.S. Supreme Court
recently ruled that participants can sue for losses). A
fidelity bond can be purchased to provide insurance and
mitigate the risk of loss should a breach of
responsibility occur. For certain types of employee
benefit plans, ERISA requires a minimum amount of
fidelity bond coverage.
If you are a plan sponsor, take this opportunity to self
assess your awareness of who is serving your plan in a
fiduciary capacity and ensure that they are aware of the
responsibilities that go along with this role.
Effectively operating and sponsoring an employee benefit
plan certainly requires an understanding of the unique
and complex nature of ERISA. But that, or the fear of
liability, should not deter you from providing your
employees the opportunity to participate in benefit
plans. The regulatory bodies responsible for ERISA
oversight recognize the need to provide increased
education and promote awareness of fiduciary
responsibilities. The U.S. Department of Labor offers
many valuable tools via its website to assist plan
sponsors in understanding fiduciary responsibilities. In
addition using highly reputable and active employee
benefit advisors to hold yours and your employees’ hands
should help to minimize risks.
Lynne Smith joined
Kingery & Crouse in 2004 as a partner in the Accounting
and Auditing Department. Lynne has over 20 years of
experience, a portion of which she was a shareholder in
the accounting and auditing department of a large local
firm located in Orlando, Florida. Kingery & Crouse, P.A.
is a full service public accounting firm with a staff of
25 dedicated professionals providing tax and accounting
services, including audits of SEC companies. You may
contact Lynne at (813) 874-1280 ext #224. Find us on the
web @ www.tampacpa.com.
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