What is an ERISA Section 103 Qualified Public Accountant?

The Employee Retirement Income Security Act of 1974 (ERISA) establishes standards to protect the assets of employee benefit plans, requiring many to undergo an annual audit. This audit must be conducted by an independent qualified public accountant, a term with a specific definition under the law. The purpose is to provide an objective assessment of the plan’s financial health and operational integrity, offering security for participants’ retirement savings. A report is attached to the plan’s annual Form 5500 filing.

Defining a Qualified Public Accountant

To be considered a “qualified public accountant” under ERISA, an individual must meet criteria established by the Department of Labor (DOL). The primary requirement is professional licensure as a certified public accountant (CPA) or a licensed public accountant (LPA), holding a valid license issued by a state’s regulatory authority.

Beyond licensure, a significant requirement is independence. The DOL’s rules, outlined in Interpretive Bulletin 2022-01, demand that the accountant and their firm be completely separate from the employee benefit plan and its sponsoring employer. This independence must exist both in fact and in appearance, and an auditor cannot have any direct or material indirect financial interest in the plan or sponsor.

Certain relationships can impair independence, such as functioning in a management role or acting as an advocate for the client. Performing bookkeeping services that are later audited by the same firm or having financial ties, like holding the plan sponsor’s publicly traded securities, would disqualify an accountant. If the DOL determines an auditor’s independence was impaired, it can reject the plan’s annual filing and require a new audit.

The Accountant’s Role and Audit Scope

The primary role of the independent qualified public accountant is to examine the plan’s financial statements in accordance with U.S. Generally Accepted Auditing Standards (GAAS). The accountant then issues an opinion on whether the financial statements are presented fairly, in all material respects, in conformity with U.S. Generally Accepted Accounting Principles (GAAP). This opinion adds credibility to the financial information reported to the DOL and plan participants.

ERISA allows for two different types of audits. A full-scope audit involves examining all aspects of the plan’s financial records and operations. The auditor will test everything from participant contributions and benefit payments to the valuation of plan investments and their related earnings.

Alternatively, a plan administrator can elect for an audit under ERISA Section 103. This option is available when plan assets are held by a qualified institution, like a bank or insurance company, that certifies the investment information. The auditor does not audit the certified investment data but still examines other areas like participant data, contributions, and distributions. The audit report then provides a two-part opinion covering both the examined and certified information.

Selecting a Qualified Public Accountant

The responsibility for hiring a qualified public accountant rests with the plan administrator, and this selection is a fiduciary act. Plan administrators should seek firms with specialized experience in auditing employee benefit plans, as these audits involve unique rules not present in a typical corporate audit.

A resource for finding experienced auditors is the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC). Member firms of the EBPAQC voluntarily adhere to higher quality standards and are often more current on ERISA regulations. When evaluating candidates, plan administrators should ask specific questions about the firm’s experience, such as the number of ERISA audits they perform annually.

To further vet a potential auditor, the plan administrator should request a copy of the firm’s most recent peer review report. This report provides an external assessment of a firm’s compliance with professional standards. The engagement proposal should also be reviewed to ensure it clearly defines the scope of the audit and outlines all associated fees.