The Annual Form 5500 Audit: DOL Broadens Criteria for Independent Qualified Public Accountants

 The Department of Labor (DOL) recently removed one regulatory hurdle for public companies that maintain employee benefit plans subject to the Form 5500 requirement. Specifically, the DOL has relaxed the criteria for who qualifies as an “independent qualified public accountant,” or “IQPA.” This matters to employers because it will open the market to new accounting firms that can issue the accountant’s report for the Form 5500 annual filing. IQPAs are the auditors who issue the annual accountant’s report. While not all Form 5500-filers are subject to the accountant’s report requirement, ERISA-covered retirement plans (except for certain small retirement plans) and funded welfare plans must provide the accountant’s report annually.

Revising and restating its 1975 Interpretive Bulletin on the Independence of Employee Benefit Plan Accountants with new Interpretive Bulletin 2022-01, the DOL has changed its guidelines for determining the “independence” of an IQPA. Previously, an auditor could not be an IQPA for a plan if they, the accounting firm, or certain other “members” of the firm owned any direct or indirect financial interest in the plan sponsor during the period covered by the financial statements that are the subject of the audit or during the period of the professional engagement.

Stating that the ban on an IQPA having an ownership interest during the period covered by the financial statements was “unnecessarily restrictive” and “may serve to unduly limit ERISA plans’ access to the best qualified auditors,” under Interpretive Bulletin 2022-01, the DOL indicates that in determining whether an accountant or accounting firm is not independent, the DOL will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant or accounting firm and that of the plan sponsor or any affiliate thereof. The Interpretive Bulletin provides an example that includes a divestiture exception to its restriction on ownership. Under the exception, an accountant qualifies as an IQPA for new audit engagements even if the accountant or a member of their firm (and their families) owned publicly traded securities of the plan sponsor during the period covered by the financial statements being audited provided that:

  1. They did not audit the client’s financial statements for the immediately preceding fiscal year; and
  2. They divest their financial interests in the plan sponsor before the earlier of:
    1. the engagement letter being signed, or
    2. the audit commencing (including pre-audit planning).

This divestiture exception is limited to ownership of publicly traded securities. The Interpretive Bulletin indicates that accountants with other financial interests (subject to limited exceptions), or financial interests in a private or closely held employer will continue to be barred from issuing Form 5500 accountant’s reports for that employer’s plan during the period covered by the financial statements that are the subject of the accountant’s report.

The Interpretive Bulletin also modernizes the definition of a “member” of the accounting firm whose ownership of the sponsor’s securities could cause loss of IQPA status, moving from a geographic-based focus on coworkers and owners in the same “office” to a work-based focus on coworkers and owners in the same distinct “subgroup” of personnel who generally serve the same group of clients or work on the same categories of matters regardless of the individuals’ physical location.

While the DOL’s new guidance on IQPAs may create additional options from which plan sponsors can select an auditor, plan sponsors should keep in mind that the selection of the plan’s auditor is a fiduciary decision subject to ERISA’s fiduciary standards generally.  If you have questions about selecting or monitoring plan vendors and the related fiduciary implications, please contact a member of the Faegre Drinker Benefits & Executive Compensation team.

Interpretive Bulletin 2022-01 is effective September 5, 2022.

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