FYI Auditing Employee Benefit Plans - GAAP classifies employee benefit plans into either of two categories: 1. Defined benefit plans—The actual benefits are specified in the plan design; the plan's obligations are based on the determination of an actuary. 2. Defined contribution plans—The benefits are limited by the specified contributions to each participant's specific account. ERISA requires that pension plans be funded whether they are viewed as defined benefit or defined contribution plans.

Welfare plans may be classified as defined benefit or defined contribution plans. 1. Defined benefit plans—These are common (e.g., a specific commitment to provide healthcare coverage) and usually do not create separate accounts for each participant. 2. Defined contribution plans—Individual accounts are maintained separately for each participant, and benefits are limited to the balance in the individual's account; an example that has grown in popularity is medical flexible spending accounts. Unfunded versus Funded Plans 1. Unfunded plans—The benefits are either paid from the employer's assets or by insurance coverage (or a combination of those); ERISA exempts unfunded plans, which exempts most welfare plans. (The auditor is not responsible for determining whether the plan is “unfunded” or “funded”; the plan sponsor's legal counsel should be involved in determining that.) 2. Funded plans—If any portion of an ERISA benefit plan is deemed “funded,” then all of the plan's activities are subject to the ERISA audit requirements; in this case, the plan assets are required to be held in trust.