FYI Auditing Employee Benefit Plans - Defined Contribution Plans 1. 401(k) plans—These permit employees to defer a portion of their income to the pension plan; taxes are deferred until a distribution is made at a future date. The employer may make a matching contribution, although employer contributions generally are not required. 2. Roth 401(k) contributions—Subject to specific tax requirements, contributions are made with after-tax dollars so that neither the original contribution nor the investment earnings will be subject to taxes when distributed. 3. 403(b) plans—Similar to 401(k) plans, these are associated with charitable organizations and public school entities; there are numerous technical requirements, including a “universal availability” requirement that nearly all employees are entitled to participate in the plan; also, plan assets may be held in a custodial account and need not be held in trust. 4. Employee stock ownership plans—ESOPs are stock incentive plans primarily invested in the employer's securities; these plans are subject to many complex technical issues that require auditors to study the underlying plan document in detail.

General Audit Considerations ERISA Audit Requirements—ERISA requires an annual audit by an “independent qualified public accountant” of the financial statements of employee benefit plans (i.e., those that are not exempt from such a requirement). 1. Pension plans—An audit normally is required for a pension plan covered by ERISA having at least 100 participants at the start of the plan year (considered a “large” plan); the number of “participants” is based on those eligible to participate regardless of the number actually participating. 2. Welfare plans—An audit is normally required for a welfare plan covered by ERISA having the following characteristics: (a) it is a “large” plan having at least 100 participants at the start of the plan year (based on those who have actually elected to participate), and (b) the plan is “funded” (meaning that assets are held in trust or an account is established in the plan's name). 3. Additional exemptions—There is a general exemption for pension plans of any number of participants when (1) the benefits are provided by an insurance contract for each participant, and (2) those insurance contracts are funded by premiums paid from the employer's general assets (perhaps paid in part by participants’ contributions); there is a similar general exemption for welfare plans of any number of participants.