Auditing Employee Benefit Plans. Josie Hammond
Benefit-responsive contracts require certain disclosure in the notes, such as description of the nature of the investment contracts by type (for example, traditional or synthetic), total contract value by each investment contract type, and any limitation on the plan’s ability to transact at contract value, as well as events or circumstances which allow issuers to terminate and settle the contracts at an amount different than contract value.
Accounting and reporting for contributions
Contributions received by an employee benefit plan should be recorded as additions to net assets on the statement of changes in net assets available for benefits. Contributions are typically received from plan sponsors and/or participants. Contributions may be in the form of cash or noncash (that is, employer stock). Sources of contributions should be identified in the financial statements as well as segregated between cash and noncash. Contributions receivable reported on an employee benefit plan financial statement represent amounts due to the plan as a result of legal or contractual obligations or formal commitment. Participant contributions should be recorded as plan assets in the period withheld or collected by the sponsor. The plan should record contributions receivable net of any allowance for amounts deemed uncollectible. The basis used in determining contributions should be disclosed. Plans subject to ERISA funding requirements should disclose whether those requirements have been met.
Help desk. Plan sponsors may fund employer contributions up until the date of the sponsor’s tax return, as extended, and still apply them to the previous year. If the plan sponsor elects to make an additional contribution attributable to the year under audit after the financial statements and Form 5500 have already been filed, the additional contribution should be treated as a subsequent event. If Form 5500 is amended and re-filed, a reconciliation note should be added to the financial statements, including information to reconcile the contributions per the financial statements to Form 5500 as a result of the subsequent event. In addition, the auditor’s opinion should be dual-dated for the subsequent event. The plan’s financial statements should not be restated unless an error has occurred.
Participant contributions must be funded as soon as they can be reasonably segregated from the employer’s general assets. This will be discussed later in the course.
EBSA enforcement initiative
Timeliness of remittance of participant contributions remains an enforcement initiative of the Employee Benefits Security Administration (EBSA). The DOL has established a Voluntary Fiduciary Correction Program to help plan sponsors voluntarily correct ERISA violations, such as delinquent contributions. Visit https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource- center/faqs/vfcp.pdf for further information.
Participant contributions are considered plan assets on the earliest date they can be reasonably segregated from the employer’s general assets (the general rule), but in no event later than (1) the 15th business day following the end of the month in which amounts are withheld from, or paid by, employees (the maximum period) for a pension plan or (2) 90 days after contributions are withheld from or paid by employees (the maximum period) for a welfare benefit plan. The maximum periods prescribed do not represent safe harbors to the general rule that participant contributions should be remitted as soon as they can be segregated. Untimely remittance or failure to remit participant contributions constitutes a prohibited transaction under ERISA, requiring additional reporting and disclosure. The IRS is also pursuing this matter. The timely deposit of participant contributions is item number 8 on their top 10 list of 401(k) plan audit issues.
On January 14, 2010, the DOL finalized a rule to protect employee contributions deposited to small pension and welfare benefit plans with fewer than 100 participants, by providing a safe harbor period of 7 business days to make the deposit of such funds to the plan following withholding from employees. This rule provided greater clarity to employers as to when contributions are to be remitted to the plan, as compared to the general rule that assets should be remitted as soon as they can be segregated. This rule does not apply to larger plans (plans with greater than 100 participants), due to the cost of analysis and lack of information or sufficient information to evaluate the effect on the larger plan. However, at the same time that the DOL finalized this rule, they revised the example for large companies to illustrate deposits made within not less than three business days from the payroll date. This is in contrast to the old example, which illustrated deposits made within the first few days of the following month for large complex payroll systems.
Help desk. The EBSA provides technical guidance on the application of ERISA through Field Assistance Bulletins (FABs), which are posted to the EBSA’s website at https://www.dol.gov/agencies/ebsa under Technical Guidance. FAB 2008-01 addresses the responsibilities of fiduciaries and trustees of ERISA-covered plans for collection of delinquent contributions.
Notes receivable from participants (participant loans)
Certain defined contribution plans allow participants to borrow against their vested account balance. Such participant loans are an extension of credit to a plan participant by the plan, in accordance with the plan document or the plan’s written loan policy. The loan is secured by the participant’s vested account balance. Participant loans should be classified as notes receivable from participants for reporting purposes, and should be measured at their unpaid principal balance plus any accrued but unpaid interest.
The fair value measurement guidance and disclosure requirements of FASB ASC 820 do not apply to participant loans. Also, the fair value disclosure requirements for financial instruments under FASB ASC 825-10-50-10 through 50-16 are not required for participant loans. In addition, participant loans are excluded from the definition of financing receivables under FASB ASC 310-10-50-5B and 310-10-50-7B. Therefore, these loans would not be subject to the requirements of FASB ASC 310-10.
Help desk. Participant loans should continue to be reported as plan investments on Form 5500, Schedule H (and, therefore, on the supplemental schedule of investments held attached to the audited financials), at the unpaid principal balance.
Participant loans in which the participant has a distributable event (such as employment termination, death, or disability) would be considered distributions. At such point, the loan is recorded as a distribution and removed from net assets available for benefits.
Where a distributable event has not occurred, a participant may miss or become delinquent in loan repayments. Such delinquent loan would be considered a “deemed distribution” for tax and Form 5500 purposes. A delinquent loan generally does not become a deemed distribution until the end of the calendar quarter following the quarter in which the repayment was missed. Delinquent loans (although they may be “deemed distributions” for tax purposes) are considered to be assets of the plan for financial statement purposes, and continue to accrue interest, until they are determined to be uncollectible or cancelled in the event the loans go into “default.” Therefore, this may result in a reconciling item between Form 5500 and financial statements.
The fact that the participant pays tax on the amount of the delinquent