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Mr. Robert C. Gerald
18 Ward Avenue
Staten Island, New York 10304
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Dear Mr. Gerald:
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This is in response to your most recent letter regarding the audit
requirements under the Employee Retirement Income Security Act of 1974, as
amended, (ERISA) for certain welfare benefit plans (i.e., health plans)
which retain the services of third party administrators (TPAs). Our letters
dated December 23, 1997, and January 13, 1998, as well as your telephone
conversations with Eric Raps from my staff and Marcus Aaron from the Office
of the Chief Accountant responded to your previous questions. Your latest
inquiry appears to re-focus on the question of whether a TPA providing
services to an ERISA-covered plan must hire its own accountant to examine
its operations and render an opinion thereon. Our prior correspondence
included an explanation of the Department’s annual reporting limited
exemptions for certain types of insured and unfunded plans. For
simplicity’s sake, we assume for purposes of this letter that your inquiry
is with respect to a plan that is both required to file the Form 5500 Annual
Return/Report of Employee Benefit Plan (Form 5500) and engage an independent
qualified public accountant (IQPA) to conduct an examination of the
financial statements and schedules of the plan.
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Under ERISA section 103 and 29 CFR § 2520.103-1, the plan’s IQPA is
required to form an opinion on whether the plan’s financial statements and
schedules are presented in conformity with generally accepted accounting
principles (GAAP) applied on a basis consistent with that of the preceding
year. In addition, the examination must be conducted in accordance with
generally accepted auditing standards (GAAS) and involve tests of the books
and records of the plan as considered necessary by the IQPA. In order to
conduct an audit of a plan in accordance with GAAS, the IQPA must obtain a
sufficient understanding of the internal control structure necessary to
arrange the audit and to determine the nature, timing, and extent of the
audit procedures to be performed. To the extent that a plan uses a service
organization, such as a TPA, to, for example, execute and record
transactions, and process related data on behalf of the plan, the activities
of the service organization may affect the plan’s financial statements.
Under these circumstances, it may be necessary for the plan’s IQPA to
contact the TPA to obtain specific information about the TPA’s internal
control structure and/or visit the TPA to examine its internal controls for
handling plan assets.
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The American Institute of Certified Public Accountants (AICPA) has issued
Statement on Auditing Standards 70 (SAS 70), Reports on the Processing of
Transactions by Service Organizations. SAS 70 provides an alternative method
for examining the internal controls of a service organization, including a
TPA. Under this alternative method, a TPA may hire its own auditor to
evaluate and report on its internal control structure. The report prepared
by the TPA’s auditor is then made available to the plan and the plan’s
IQPA who may use the report as a basis for evaluating the plan’s internal
control structure. Thus, ERISA’s annual reporting provisions do not
require that a TPA hire its own auditor, however, a TPA, in order to
facilitate the audit of a plan which uses that TPA, may choose to comply
with SAS 70.
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I hope this information is helpful to you. We would suggest that you contact
an attorney or certified public accountant with specialized expertise in
employee benefit matters to the extent that you need further individualized
legal or accounting advice in this area.
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Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations
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