Distinguishing Defined Contribution, Defined Benefit, and Other Employee Benefit Plan Types

Employee benefit plan audits begin with the plan type. A defined contribution plan, defined benefit pension plan, health and welfare plan, employee stock ownership plan, or multiemployer plan can all be subject to ERISA reporting, but the audit risks are not the same.

For AUD, the safest approach is to identify who bears the risk and what the plan promises. If the participant receives an account balance, the audit often centers on participant data, contributions, allocations, investments, and distributions. If the plan promises a formula-based benefit, the audit also focuses heavily on actuarial assumptions and benefit obligations.

    flowchart TD
	    A["Employee benefit plan"] --> B{"What does the plan promise?"}
	    B -- "Individual account balance" --> C["Defined contribution plan"]
	    B -- "Formula-based retirement benefit" --> D["Defined benefit plan"]
	    B -- "Medical, disability, life, or other welfare benefits" --> E["Health and welfare plan"]
	    B -- "Employer stock ownership" --> F["ESOP"]
	    C --> G["Audit contributions, allocations, participant accounts, investments, and distributions"]
	    D --> H["Audit assets, participant data, actuarial obligations, assumptions, and funding disclosures"]
	    E --> I["Audit claims, premiums, reserves, eligibility, and benefit obligations"]
	    F --> J["Audit employer stock valuation, allocations, debt, and participant accounts"]

Plan-Type Sorting

The plan type determines the financial statement accounts, assertions, specialists, and disclosures that matter most.

Do not treat all plans as 401(k) audits. The same plan document, ERISA, Form 5500, and audit-reporting concepts apply broadly, but the audit procedures change with the plan’s promise.

Defined Contribution Plans

A defined contribution plan defines contributions, not the final benefit. Common examples include 401(k), 403(b), profit-sharing, money purchase pension, and many ESOP structures. Participants usually have individual accounts.

The common audit risk is that payroll, HR, recordkeeper, and custodian data do not agree. If eligible compensation, deferral elections, service dates, or vesting are wrong, participant accounts can be wrong even when the investment statement is accurate.

Defined Benefit Plans

A defined benefit plan promises a formula-based benefit. The formula may use years of service, final average compensation, age, or other plan-specific factors. The sponsor bears investment and actuarial risk because the plan must be able to pay promised benefits.

The exam trap is focusing only on plan assets. In a defined benefit plan, the obligation side can be as important as the asset side because actuarial assumptions drive the measured benefit obligation.

Other Plan Types

Some employee benefit plans have specialized audit concerns beyond ordinary DC and DB plans.

Classification matters. A cash balance plan may look like a defined contribution account to participants, but it is generally a defined benefit plan for audit and actuarial purposes.

Audit Focus by Assertion

The auditor should connect each procedure to the plan’s promise. Testing individual account allocations makes sense in a DC plan; evaluating actuarial assumptions is central in a DB plan.

Exam Traps

• In a defined contribution plan, the participant generally bears investment risk.
• In a defined benefit plan, the sponsor generally bears investment and actuarial risk.
• A cash balance plan can look account-based but still be a defined benefit plan.
• ESOP audits often require attention to employer stock valuation and related-party issues.
• Health and welfare plan audits may focus on claims and eligibility rather than retirement investments.
• Accurate custodian information does not fix bad payroll, eligibility, vesting, or participant census data.
• The plan document controls eligibility, contributions, vesting, distributions, and loans.

Quick Review

Use this sequence for plan-type questions:

1. Identify what the plan promises to participants.
2. Decide who bears investment or actuarial risk.
3. Locate the plan document provisions.
4. Identify the accounts and disclosures most affected by the plan type.
5. Match audit procedures to payroll data, participant data, investments, obligations, and benefit payments.
6. Watch for specialized plans such as ESOPs, health and welfare plans, 403(b) plans, and cash balance plans.

Review Questions