On July 31, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient. The ASU was in response to consistent feedback received from employee benefit plan financial statement users. The ASU covers three areas for entities that follow the requirements in FASB Accounting Standards Codification (“ASC”) Topics 960, 962 and 965:
I. Fully Benefit-Responsive Investment Contracts
Part I of the ASU applies to applicable entities that hold investments in fully benefit responsive investment contracts (“FBRICs”), as defined by the FASB ASC Master Glossary. This update redefines a FBRIC and requires that FBRICs be measured, presented and disclosed at contract value, as contract value is the relevant measure of the portion of the net assets available for benefits of a defined contribution plan for a FBRIC. This update eliminates the need for a plan to calculate the fair value and present a reconciliation from contract value to fair value as the employee benefit plan financial statement users consider this to not be decision-useful information, as contract value is the amount participants would normally receive if they were to initiate permitted transactions.
II. Plan Investment Disclosures
Part II of the ASU is to reduce the complexity in the employee benefit plan financial statement in line with the FASB’s overall Simplification Initiative as minimal changes have been made to pension plan accounting since 1980 (release of FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans) while other portions of FASB were updated and were applicable to employee benefit plan financial statements which resulted in increased disclosures and accounting requirements.
- Elimination of investments that represent more than 5% of net assets available for benefits
- Elimination of the disclosure of net appreciation/depreciation by investment type
- Elimination of the need to disaggregate investments by nature, characteristics, and risks within the fair value hierarchy
- Elimination of the need to disclose an investment’s strategy if the investment is a fund that files a Form 5000 as a direct filing entity
III. Measurement Date Practical Expedient
FASB ASU 2015-04 Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, was issued in April 2015, which provided a practical expedient that allows employers to measure defined benefit plan assets on a month-end date that is nearest to the employer’s fiscal year-end, when the fiscal period does not coincide with a month-end. Thus, part III of this update provides a similar measurement date practical expedient for employee benefit plans. If a plan applies the practical expedient and a contribution, distribution, and/or a significant event occurs between the alternative measurement date and the plan’s fiscal year-end, the plan should disclose the amount of the contribution, distribution, and/or significant event. The plan should also disclose the accounting policy election and the date used to measure investments and investment-related accounts.
The ASU is effective for fiscal years beginning after December 15, 2015 and early application is permitted. Entities can separately adopt each part of the ASU, but must implement all components within each part. For more information read the ASU at www.fasb.org.
By Kevin C. Bach, CPA, CVAPosted on September 15 2015 by admin
You’ve got your process figured out – 401k benefit packages are given to employees the date they’re hired, or maybe when they become eligible to participate, or maybe you rely on your TPA to communicate to the employee how to enroll when eligible. You collect all necessary enrollment forms for employees that want to participate so you can get it sent in, and get their payroll deduction setup, and then your job is done, right?
Not necessarily. What about those employees that didn’t want to participate even though they were eligible? Did you collect the enrollment form with “I do NOT wish to participate…” checked and signed by the employee or any other form of support declining enrollment? If you didn’t, there are some risks you’re inviting in your front door that you could have easily avoided!
For instance: what if an employee insisted they had intended to participate, and also insisted that they had not been properly informed they were eligible. Regardless of the truth in that statement, do you have proof otherwise? Because if you don’t, you, the employer, will have to make a QNEC (Qualified Non-Elective Contribution, or “Corrective Contribution”) contribution to the plan on behalf of that employee because of the “missed deferral opportunity.” This will be equal to 50% of the employee’s “missed deferral,” calculated by multiplying the actual deferral percentage for the year of exclusion for the employee’s group in the plan by the employee’s compensation for that year. If you contribute a matching contribution, the fun doesn’t stop there! You are also required to make a corrective contribution for any matching contribution they would have received had they been deferring their missed deferrals.
Does any of this apply to you? Make sure you read the full guidance on this and other types of corrective procedures in Rev. Proc. 2013-12. Might any of this apply to you in the future? YES! This is one simple control you can implement to reduce these risks significantly!
By Audrey D. RichardsPosted on August 18 2015 by admin
As a sponsor of an employee benefit plan, along with annual reporting requirements, you may be required to undergo an audit of your plan’s financial statements. What are the reporting requirements and what triggers an audit? This varies depending on the type and size of the plan you sponsor.
One participant plans (a business owner with no employees) have the option of filing either Form 5500-EZ or Form 5500-SF. However, if plan assets are less than $250,000, no filing is required. One participant plans have no audit requirement.
Plans with fewer than 100 participants, but are not one participant plans, must file Form 5500-SF electronically. Plans of this size are considered small plans and also have no audit requirement.
Plans with 100 or more participants must file their Form 5500 electronically. Plans of this size are considered large plans and, generally speaking, will require audited financial statements to be submitted with the Form 5500. Of course, there is an exception to this rule called the 80-120 rule. The four basic variations of this rule are as follows:
- Plan filed as a small plan in the prior plan year with no more than 120 participants at the beginning of the current plan year – the plan may continue to file as a small plan and no audit is required
- New plan with 100 or more participants at the beginning of the plan year – must file as a large plan and an audit is required
- Plan filed as a large plan in the prior plan year – the plan must continue to file as a large plan and an audit is required until that time the number of participants falls below 100 at the beginning of the plan year
- Plan filed as a large plan in the prior plan year with less than 100, but greater than 80 participants at the beginning of the current plan year – the plan has the choice of continuing to file as a large plan where an audit is required or the plan may file as a small plan and avoid the audit requirement
As a reminder, when determining the number of participants, there are three types of individuals that must be included in the count: all employees who are eligible to participate (whether they have chosen to or not); those who have retired or separated from employment, but who still have account balances; and deceased individuals whose beneficiaries are either receiving benefits or are entitled to receive benefits.
By Crystal Becerril, CPAPosted on August 4 2015 by admin
As an auditor of employee benefit plans, I often talk with clients about their plan’s participation rates and suggest ideas on how to increase participation. As part of my daily routine, I read numerous articles from different financial sources. I came across a CNBC article published on July 29th, 2015 that I found to be rather surprising. The article is titled “More American savers skimp on retirement plans” by Tom Anderson, Personal Finance Writer for CNBC.
Hearts and Wallets is a retirement market researcher and they published a recent news analysis showing that Americans are saving more, but not by the method of their employer sponsored retirement plans. The average annual household savings has increased in percentage over the last two years, based on a survey of 5,500 U.S. households by Hearts and Wallets. The Federal Reserve Bank in St. Louis stated that the personal savings rate in May 2015 was 5.1%. However, the percentage of household savings that went into employer sponsored retirement plans has been decreasing over the last two years according to Hearts and Wallets.
I ask myself… Why would more Americans be saving, but not taking advantage of employer sponsored plans? Would you leave free money on the table? These plans can save you money spent on investment management fees and often employers will match your savings contribution up to a certain amount. If you are going to save and you have the option available to participate in an employer sponsored retirement plan, it doesn’t make sense why you wouldn’t want to do that. Most plans accept rollovers (accounts of new participants from other plans) so once you leave your employer you can join the next employer’s plan.
When I speak with employers about their retirement plans and ask them what their goals for the plan are, I generally hear the same two goals. These are to increase the number of employees that participate in the plan and to increase the amount of deferrals of current participants. It is in the best interest of the employer to have a majority of their workforce saving money for retirement. In order to achieve those two goals, there are numerous avenues that an employer may use. The most obvious would be to offer an employer match. If one is already offered, then increase the amount of the match. A less obvious way would be to add automatic enrollment to the retirement plan.
According to a November 2014 study by Tower Watson, employers with participation rates above 80% in their defined contribution plans increased from 50% in 2010 to 64% in 2014. During this same time period, the share of companies offering automatic enrollment rose from 57% to 68%. There is a proven link between increased participation and retirement plans using automatic enrollment. Employers already using automatic enrollment in their sponsored retirement plans should consider adding automatic escalation to help increase deferral amounts of participants. Automatic escalation typically will increase each participant’s deferral rate a certain percentage annually, unless the participant chooses not to accept the increase. Another avenue to increase participation would be changing the fee structure of the plan so the participant pays less and the employer pays more of the fees.
Regardless of the avenue taken, it is important that employers spend time to send the message and educate their employees of the benefits available by participating in sponsored retirement plans.
By Josh Mitchell, CPAPosted on July 28 2015 by admin
Hearing the news of a compliance testing failure sounds rather daunting. The severity of a compliance testing failure varies by case, and correcting it may not be as difficult or costly as it sounds. Throughout compliance testing, traditional 401(k) plans must be tested to ensure that contributions made by and for nonhighly compensated employees (“NHCE”) are proportional to those made for and by highly compensated employees (“HCE”). These tests are referred to as Actual Deferral Percentage (“ADP”) and Actual Contribution Percentage (“ACP”) tests. There are parameters set for each test. A failure results from the ADP or ACP tests exceeding those parameters.
Correcting the error is the most vital step in the process. Corrective action described in your plan document must be taken within the statutory correction period following the close of the plan year; also an excise tax will be added to the liability if the correction is not made within the first 2 ½ months of the correction period. If the correction is not made within the 12 month statutory correction period, the plan may lose its tax-qualified status and the failure must be corrected by using the IRS Employee Plans Compliance Resolution System (“EPCRS”).
Using the EPCRS leaves you with three options for correction:
- Self-Correction Program – will permit a plan sponsor to correct the failure(s) without contacting the IRS or paying a fee
- Voluntary Correction Program – permits a plan sponsor to, any time before audit, pay a fee and obtain IRS approval for the correction of the plan failure(s)
- Audit Closing Agreement Program – allows a plan sponsor to pay a sanction and correct the plan failure(s) while the plan is under audit
The corrections will typically consist of a Qualified Non-Elective Contribution (QNEC) to raise the deferral percentage of the NHCE’s, or excess contribution amounts are determined and distributed to HCE’s with the same amount being contributed to the eligible NHCE’s.
In addition to the above options, a plan may refund excess contributions to the NHCE’s, beginning with those that have the highest amount of contributions for the plan year, and adjusting all NHCEs until the plan is compliant with the testing parameters. One negative attribute from a participant perspective is that the refunds are considered taxable income upon receipt, and will not be a portion of their retirement funds.
While implementing a Safe Harbor match will prevent such failures from happening, it is vital that plan sponsors monitor the results of such testing, or perform tests independently for additional assurance. Timeliness is key in correcting plan failures.
By Sarah McFarlandPosted on July 14 2015 by admin
When your Company hits over 120 participants within your plan, it’s time to start looking for an auditor that is right for you! As the plan administrator, one of the things you must do is evaluate your options and ensure that you hire a qualified firm to assist in your audit. There are some key qualities to evaluate when making this selection. Hiring a qualified auditor will provide a quality audit which will assist in fulfilling your responsibility to file accurate annual statements, assist with avoiding any penalties associated with filing untimely, as well assist with keeping you informed on upcoming topics related to employment benefit plans to keep your plan in compliance.
First, the auditor is required to be licensed or certified by the state regulatory authority as a certified public accountant. When an auditor steps in to complete the audit, he or she must also be independent. What does this mean? The auditor should not have any financial interests in the plan that might impact his or her ability to remain unbiased when issuing an opinion on the financial condition of the plan. Additionally, it is important that the audit firm has experience in auditing employee benefit plans. This is a common issue in employee benefit plan audits that has caused many audits to have deficiencies.
During the preparation of your first audit, there are some additional things to keep in mind. Be aware that Department of Labor’s rules and regulations permits limited scope audit on employee benefit plans when the plan’s assets are held by banks or insurance companies and they have written certifications for investment activity. Be sure to consult with an attorney, plan adviser, or auditor to ensure this is the best route for your plan. Lastly, in the final stages of selecting an auditor, the auditor will provide an engagement letter describing the terms of the audit. This normally will include responsibilities that the auditor will have as well as your responsibilities throughout the audit. This normally entails the timing, scope, and fees associated with the audit. Read this carefully and be sure to ask any questions that arise to make sure you understand and agree to the terms of the audit.
Following these simple steps should assist in finding the right auditor for you! If you have additional questions regarding the search for a new auditor please don’t hesitate to contact us for more information.
By Brie C. Keckler, CPAPosted on June 23 2015 by admin
When a 401(k) or other retirement plan requires an annual audit, a plan administrator may have a choice to engage an audit firm to perform a full-scope audit or a limited scope audit of the financial statements. To be qualified for a limited scope audit, a bank or insurance carrier must act as a trustee or custodian for the plan, be state or federally chartered and be regulated, supervised and subject to periodic examination by a state or federal agency. Additionally, the trustee or custodian must certify as to the accuracy and completeness of the investment information.
There are definitely some benefits to only receiving a limited scope audit. The main benefits can include lower audit fees and fewer areas subject to audit testing. For example, when an auditor is engaged to perform a full-scope audit, everything in the plan is subject to audit testing. However, when performing a limited scope audit of the financial statements, the auditor need not perform any auditing procedures with respect to investment information prepared and certified by the qualified trustee or custodian. Note that the limited scope exemption applies only to investment information including investments, investment income, and related expenses, and potentially participant loans. With a limited scope audit, the auditor will continue to test participant data, including the allocation of investment income/losses to individual participant accounts, contributions, benefit payments and other information that was not certified.
When it is time to issue the audited financial statements, the CPA who is hired to perform a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. The CPA’s opinion is called a Disclaimer of Opinion because the CPA has not been able to do sufficient work to form an overall opinion on the financial statements. However, the Department of Labor will accept a Disclaimer of Opinion for a limited scope audit with no penalties.
By Ryan G. Wojdacz, CPAPosted on June 9 2015 by admin
On May 18, 2015, the U.S. Supreme Court issued its opinion in the Tibble v. Edison Int’l case. In 1999 and 2002, Edison International added 6 retail mutual fund options to the available investment options for the company’s 401(k) plan. All 6 mutual funds had virtually identical institutional-class mutual funds that charge lower investment fees. Petitioners had sued Edison International seeking to recover damages incurred from the higher fees charged by the retail investment options.
The Supreme Court’s decision stated that, under trust law, a fiduciary has a continuing duty to review the investment options and to remove imprudent options. Therefore, the statute of limitations did not apply to the investments added in 1999 and 2002.
This decision should prompt all plan sponsors to evaluate whether they have a sufficient and documented process in place to prove that they have fulfilled their responsibility to review investment options on a continual basis. If you are a plan fiduciary and are wondering if you are fulfilling your responsibilities for reviewing investments, please take the time to read the Department of Labor’s Report of the Working Group on Prudent Investment Process.
By Rex Platt, CPAPosted on May 26 2015 by admin
I would like to address disclosure versus communication. They are two very different things, but they shouldn’t be. Have you ever tried to read ERISA or DOL regulations? The average person doesn’t read this stuff. Lawyers read it because it is in their language. Lawyers are the ones who write this stuff.
Imagine a Company with 100 employees that has a 401(k) plan. If I walked into that Company and asked every employee if they have read the Company’s 401(k) plan document, how many employees would say yes? I am willing to bet 10 or less and part of that 10 would be the employees responsible for managing the plan. Is that bad? Not necessarily, because there are things called Summary Plan Descriptions (SPD’s). A SPD is supposed to be written as a high level summary of the plan that is not flooded with legal language that confuses participants. If I asked how many employees have read the Summary Plan Description (SPD) I am willing to bet that the answer would be closer to 50 out of 100 employees (assuming all 100 employees are participants). But out of those 50 employees, how many actually understood everything and read the full document? 30? 15? 10? That’s the problem. SPD’s are typically written by lawyers with the primary goal to protect plan sponsors instead of inform plan participants in easy to understand language. This is an example of the disconnect between disclosure and communication.
Over the past five years, the DOL has done impressive things to help advance the protection of plan participants. One of those impressive things was paying more attention to and increasing the regulation on disclosures involving participant fees. However, in my opinion, the DOL could have done a better job in executing this initiative to enhance the transparency and disclosure of participant fees. Did you know the current regulatory regime regarding participant fee disclosure allows for documents in excess of 15 or 20 pages and formulas that require a calculator to figure out? These disclosures are designed with the hope that the average participant will not pay any attention because it will take too much time to figure out. That’s not communication. Even worse, disclosure of participant fees are typically in basis points or rates, which makes it more difficult for the average participant to figure out.
My question – Why does the DOL not require a one page year-end itemized fee summary highlighting the actual cost of the plan in dollars? Why is there not a required uniform disclosure amongst all service providers related to fee disclosure? There are Fiduciary Service companies that gather fee information for clients and create a report that provides a uniform comparison of all provider fees that allow plan sponsors to perform fee benchmarking analyses. So it would make sense if the DOL created a template that all providers must use when quoting and disclosing fees, right? Leading plan administrators have already taken it upon themselves to provide this one page summary to participants.
I believe that the DOL has done and will continue to do great things to protect and inform plan participants. However, I think the DOL needs to realize their downfalls in communicating to the average 401(k) participants. In my opinion, I think the DOL is missing the connection between disclosure and communication on certain issues such as disclosure of plan participant fees. Confusing disclosure language is not likely to be read by the average 401(k) participant, but direct communication in plain English is likely to be read.
By Josh Mitchell, CPAPosted on May 19 2015 by admin
During April 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-28 that made amendments to the safe harbor corrective contributions for employee benefit plans. The Employee Plans Compliance Resolution System (EPCRS) allows plan sponsors to correct certain failures and thereby, continue to provide employees with retirement benefits. The IRS received numerous comments requesting special correction methods for plans with automatic contribution failures. These comments have surrounded the fact that employers were discouraged from adopting automatic contribution features due to potential implementation issues and the fees and corrective contributions associated.
This new Revenue Procedure makes modifications for the following:
- Auto Contribution and Escalation Errors – New safe harbor EPCRS correction methods including automatic enrollment and automatic escalation of elective deferrals in plans described in § 401(k) and § 403(b)
o No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of
- 9.5 months after the end of the plan year in which the failure first occurred
- The last day of the month after the month the affected employee first notified the Plan Sponsor
o This safe harbor correction method is currently set to expire in 2020, but the IRS will reconsider an extension
- Elective Deferral Errors – Special safe harbor correction methods for plans (including those with automatic contribution features) that have failures that are of limited duration and involve elective deferrals
o No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:
- 3 months after the failure first began
- The last day of the month after the month the affected employee first notified the Plan Sponsor
o 25% corrective contributions are required if the period of failure exceeds three months and if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:
- The last day of the second plan year after the plan year in which the failure first began.
- The last day of the month after the month the affected employee first notified the Plan Sponsor
Overall, if a Plan Sponsor wants to implement the new guidance he or she must:
- Give written notice to employees affected by the error no later than 45 days after the correct deferrals begin
- Make corrective contributions to make up for missed matching contributions plus earnings on all missed contributions and deferrals, within the two-year timeframe used to correct significant operational failures under Revenue Procedure 2013-12
For further information see the Internal Revenue Bulletin here.
By Kevin Bach, CPA, CVA-- Older Entries »
Finding information on employee benefit plans can be difficult and time consuming. As a service to our clients, and other interested parties who are involved in or in need of employee benefit services, we'll gather all of the information for you. We'll keep you up-to-date on the latest laws and regulations and we will even add our own personal insight into what else is occurring in the employee benefits world. We will provide these posts weekly and hope to get your input and feedback on the various topics. We will also share that feedback with others, as we find appropriate.
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- FASB’s Employee Benefit Plan Reporting Simplification
- Do I Need an Audit?
- Compliance Testing Failures – Now What?
- Key Qualities to Evaluate When Selecting an Auditor for Your Employee Benefit Plan
- Full Scope vs. Limited Scope Audits
- Supreme Court Rules that Plan Sponsors Have Duty to Monitor Investment Options
- Language Barriers of 401(k) Disclosure
- Reduced Corrective Contributions
- Internal Control for Plan Management
- 401K Plan Fee Assessment