Plan types and their financial statements: defined contribution, defined benefit and welfare

• Distinguish the financial statements of defined contribution, defined benefit and welfare plans
• Identify the accounting guidance for each plan type
• Relate each plan type’s structure to its key audit risks
• Recognize 403(b) and multiemployer features that change audit scope

Why plan type matters

Every ERISA plan audit applies AU-C 703 and GAAS, but the plan type decides what is on the balance sheet, which accounting guidance applies, and where the risks of material misstatement sit. The FASB Accounting Standards Codification has a topic for each: ASC 960 for defined benefit pension plans, ASC 962 for defined contribution pension plans and ASC 965 for health and welfare benefit plans.

Defined contribution plans

401(k), 403(b), profit sharing and money purchase plans give each participant an individual account. The financial statements are a statement of net assets available for benefits and a statement of changes in net assets available for benefits. The participant bears the investment risk, so there is no benefit obligation on the statements. Key risks:

• contributions: timely remittance of deferrals and correct application of the plan's definition of compensation;
• participant data and allocations: earnings and contributions credited to the right accounts;
• distributions and loans: eligibility, vesting and calculation;
• investments: valuation, and whether a 103(a)(3)(C) certification covers them.

Participant loans are presented as notes receivable from participants. Fully benefit-responsive investment contracts held by a defined contribution plan are measured at contract value. 403(b) plans add risks around individually owned annuity contracts and vendor coordination; see the 403(b) audit considerations guide.

Defined benefit plans

A defined benefit plan promises a formula benefit, and the employer bears the investment risk. Under ASC 960 the financial statements present net assets available for benefits, changes in net assets, the actuarial present value of accumulated plan benefits and the changes in it. That means the audit relies on an actuary's work: you evaluate the actuary as a management's specialist, test the census data the actuary used and assess the significant assumptions. Contributions are driven by funding requirements and appear on Schedule SB or MB. The ASC 715 defined benefit basics guide covers the sponsor side of the same plan.

Health and welfare plans

Under ASC 965, a funded health and welfare plan presents net assets and benefit obligations, including claims incurred but not reported. Key risks are claims processing by a third-party administrator, eligibility of covered individuals and the IBNR estimate. Many welfare plans need no audit because they are unfunded or fully insured under 29 CFR 2520.104-44. Plans with a trust, such as a VEBA, or with participant contributions held outside that exemption usually do.

Single employer, multiple employer and multiemployer

A single-employer plan covers one controlled group. A multiemployer plan is collectively bargained and funded by many employers, which brings contribution testing through payroll audits of contributing employers. Multiple employer plans and pooled employer plans combine unrelated employers and add a layer of administrative and allocation risk.

Planning implications

For each plan, the planning memo identifies the plan type, the accounting guidance, the service organizations (recordkeeper, trustee, custodian, third-party administrator) and the SOC 1 reports you will use, and whether management elects a 103(a)(3)(C) audit. Use the EBP audit planning memo and the SOC report review guide.

Common mistakes

• Defined benefit files with no evaluation of the actuary or test of census data.
• Health and welfare files with no work on the IBNR estimate.
• Defined contribution files that rely on a recordkeeper SOC 1 report without testing the complementary user entity controls at the sponsor.

Three plans at one sponsor