Betsy Krisher, CPA, CGFM, Maher Duessel Chairman/Chief Executive Officer, has been named President-Elect of the Pennsylvania Institute of Certified Public Accountants (PICPA) for 2022-2023. She previously served as Treasurer on the PICPA Board of Directors and also is a member of the PICPA’s Diversity & Inclusion Advisory Board. Ms. Krisher participated in PICPA’s annual meeting and 125th celebration on June 1st. Photos and additional details from this event are here. Also, check out the Pittsburgh Business Time’s article on this appointment.
President, Betsy Krisher, CPA, CGFM, has been named Treasurer of the Board of the Pennsylvania Institute of Certified Public Accountants (PICPA). Betsy was sworn at PICPA’s 124th annual meeting held June 11, 2021.
The CARES Act includes several provisions that affect qualified Employee Benefit Plans. These include:
1. A new in-service distribution option, called a Coronavirus-Related Distribution (CRD). The CRD is optional (plan sponsors may or may not elect to adopt this provision) and it allows participants who meet specific conditions to take a CRD of up to $100,000 from eligible retirement plans (401(k), 403(b), governmental 457(b)) or an IRA without incurring a 10% early withdrawal penalty. CRD’s are available to a participant who was diagnosed or whose spouse or dependent was diagnosed with COVID-19, or to a participant (referred to as a “qualified individual”) who has experienced adverse financial consequences as a result of a) being quarantined; b) job loss or work hour reductions; c) being unable to work due to a lack of childcare; or d) closure or reduced operating hours of an owned or operated business. Eligible distributions can be taken up to December 31, 2020. CRD’s are permitted to be repaid to the plan over a three-year period. These repayments will be treated as tax free rollovers into the participant’s account. The plan administrator may rely on a participant’s self-certification that the participant satisfies one of the conditions for a CRD.
2. Expanded loan provisions. If a plan sponsor elects to adopt this provision, participants who meet the conditions specified under the CRD rules, may borrow up to $100,000 or 100% of their vested balance from qualified plans (an increase from $50,000 or 50% previously allowed). This provision only applies to loans made during the period from March 27, 2020 to September 23, 2020. In addition, qualified individuals with loan repayments due between March 27, 2020, and December 31, 2020, can delay their loan repayments for up to one year. During this time, interest continues to accrue. Plan sponsors may immediately implement the CRD and expanded loan provisions. The deadline to amend plan documents is the last day of the plan year beginning on or after January 1, 2022.
On June 19th, the IRS issued Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act. The notice expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 on the individual’s spouse or household member.
3. Suspension of Required Minimum Distributions (RMDs) for 2020. RMDs for 401(k), 403(b), 457(b) plans, and traditional IRAs are temporarily suspended for 2020. In cases where a participant or IRA holder already received an RMD during 2020, they can roll that amount over or roll it back into a qualified plan or IRA. On June 23rd, the IRS issued Notice 2020–51. The notice answers questions relating to the waiver of 2020 RMDs and provides a sample plan amendment that, if adopted, would provide participants a choice whether to receive waived RMDs and certain related payments. The notice also provides transition relief for plan administrators and payors in connection with the change in required beginning date for RMDs under the SECURE Act.
4. Relaxed Minimum Funding Rules for Single-Employer Defined Benefit Plans. The CARES Act defers the due date for all contributions (including quarterly contributions) originally due in 2020 to January 1, 2021. The amount of any deferred contributions is increased by interest accruing for the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan for the plan year which includes such payment date.
In addition to the changes under the CARES Act, plan sponsors and plan participants face economic and other challenges brought on by the COVID-19 pandemic that may impact Employee Benefit Plan activity and operations. These could include:
1. Delayed, reduced, or suspended plan contributions
2. Participant loan collectability problems
3. Plan terminations or partial plan terminations due to workforce downsizing
4. Changes in business processes and internal controls
5. Financial deterioration of the plan sponsor, resulting in short-term liquidity and long-term solvency problems
6. Heightened going concern risks
7. Declines in the fair values of investments
8. Decreased reliability of assumptions used in valuations and other estimates
Plan sponsors should be aware of the impact these changes and challenges could have on the audit process, including:
1. As the number of distributions and distribution amounts may increase, your auditors may pull larger samples of loans and distributions.
2. If your organization implemented new procedures and controls due to the pandemic, your auditors will likely review them. They will also want to verify that the controls you relied on prior to the pandemic are still operating.
3. Expect your auditors to ask more questions and to take a bit more time this year.
4. You may be requested to provide more financial statement disclosures this year than what you have in the past. These disclosures could include a) comments on market fluctuations; b) significant changes to the plan; or c) a going concern disclosure, which contains information about your organization’s ability to operate in the future.
Below are some actions you can take now to prepare for this year’s employee benefit plan audit:
1. Have a thorough understanding of your organization’s controls and processes and what has changed, and be prepared to convey the changes to your auditors. This is an ideal time to review your organization’s employee benefit plan procedures and modify them as needed.
2. Make sure there is someone at your organization with access to the plan and knowledge of the plan’s processes that the auditors can contact, with any questions or concerns.
3. Document, document, and document! Maintain documentation of any changes to procedures, personnel involved, controls and documentation used for your employee benefit plan. In addition to all of your plan documents, your auditors will also need access to human resources, payroll, and financial information concerning plan participants and plan administration.
4. Make sure that only appropriate personnel can access pertinent materials. Always keep track of which employees have access to sites used for communication with your plan’s service providers. Make sure to also deactivate former employees’ accounts and access to sites to help reduce the risks of fraud and identity theft.
5. Your auditors will be in touch about scheduling and logistics of the audit well in advance, given the changes and restrictions brought about by COVID-19. This will ensure the audit goes smoothly.
If you have any questions regarding the changes brought about COVID-19 with respect to your employee benefit plan and audit this year, please contact your audit team.
What is ERISA?
The Employee Retirement Income Security Act (ERISA) of 1974 governs the operation, administration, and annual reporting for retirement and welfare plans. ERISA is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry (including non-profit organizations) to provide protection for individuals in these plans. In general, ERISA does not cover retirement plans established or maintained by governmental entities or churches. It also does not cover plans which are maintained solely to comply with workers’ compensation, unemployment, or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans.
ERISA is comprised of four parts:
- Title I establishes rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, and civil enforcement and is administered by the Department of Labor (DOL), specifically the Employee Benefit Security Administration (EBSA).
- Title II amended the internal revenue code to parallel many of the Title I rules and is administered by the Internal Revenue Service (IRS).
- Title III is concerned with jurisdictional matters and coordination of enforcement and regulatory activities by the DOL and the IRS.
- Title IV covers the insurance of defined benefit pension plans and is administered by the Pension Benefit Guarantee Corporation (PBGC).
What is a Defined Contribution Plan?
A Defined Contribution Plan is
a plan that provides an individual account for each participant and provides
benefits that are based on (a) amounts contributed to the participant’s account
by the employer and/or employee, (b) investment gains/losses, (c) any
forfeitures allocated to the account, and (d) any administrative expenses
charged to the plan. The total of the individual participant accounts is equal
to the net assets available for benefits. The two most common types of Defined
Contribution Plans established by non-profit organizations are 403(b) (also
known as a tax-sheltered annuity or TSA plan) and 401(k) plans.
What are the Similarities Between 401(k) and 403(b) Plans?
- Employees may elect to have their employer withhold and contribute a portion of their wages (elective deferral) to an individual account under the plan.
- Generally, elective deferrals are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return.
- Both types of plans are permitted to allow employees to designate some or all of their elective deferrals as “Roth elective deferrals” which are included in the employee’s taxable income in the year of the deferral.
- Employers may match the amount employees decide to contribute (called a matching contribution), contribute a percentage of each employee’s compensation to the employee’s account (called a nonelective contribution), or do both.
- Annual contribution limits exist for elective deferrals, as well as for combined employer and employee contributions. Contribution limits for 2019 can be found here.
- Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).
- Both types of plans may allow for loans or hardship distributions.
What are the Differences Between 401(k) and 403(b) Plans?
Any type or size of entity can sponsor a 401(k) plan. Only public schools (including colleges and universities), churches, and entities tax-exempt under Section 501(c)(3) of the Internal Revenue Code are eligible to sponsor a 403(b) plan.
Some types of 403(b) plans are exempt from ERISA:
- Governmental plans (e.g., plans sponsored by a state, county, or municipality or one of their agencies, schools, or instrumentalities).
- Church plans, unless the plan sponsor has voluntarily elected to have the plan covered by ERISA.
- The DOL “safe harbor” rules in 29 C.F.R. § 2510.3-2(f) provide that a plan is not “established or maintained” by an employer, and, therefore, is not an employee pension benefit plan subject to Title I, if:
is a program for the purchase of annuity contracts or custodial accounts in
accordance with provisions of 403(b) of the Code.
is funded solely through salary reduction agreements or agreements to
forego an increase in salary.-Participation
of employees is completely voluntary.-All
rights under the annuity contract or custodial account are enforceable solely
by the employee or beneficiary of such employee.
employer receives no direct or indirect consideration or compensation other
than reasonable reimbursement to cover expenses incurred in performing the
employer’s duties pursuant to the salary reduction agreements.
-The involvement of the employer is
limited to certain optional specified activities. Generally, the employer
cannot make employer contributions, authorize plan-to-plan transfers, process
distributions, establish hardship withdrawals, make qualified domestic
relations order (QDRO) determinations, determine loan eligibility, enforce
loans, or negotiate with the plan vendor as it relates to terms of their
- Under a 403(b) plan, investments can only be made in an
annuity contract provided through an insurance company or a custodial account
invested in mutual funds. This is not
the case for 401(k) plans.
- 401(k) plans tend to be administered by mutual fund
companies, while 403(b) plans are more often administered by insurance
What are your Fiduciary Responsibilities in Administering your Plan?
The employer entity sponsoring the plan (plan sponsor), is responsible for keeping the plan in compliance. Many actions needed to operate a plan involve fiduciary decisions.It is important that you identify the fiduciaries of your plan. Fiduciaries are persons or entities who exercise discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so. Examples of plan fiduciaries include plan trustees, plan administrators, and members of a plan’s investment committee.
What are the responsibilities of fiduciaries?
- Act solely in the interest of the participants and their beneficiaries.
- Act for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries and defraying reasonable expenses of the plan.
- Carry out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters.
- Follow the plan documents.
- Diversify plan investments and consider risk of loss.
- Ensure the plan does not participate in prohibited transactions.
What are some measures a plan sponsor can take to avoid a potential breach of fiduciary duty?
- Document the decision process for all decisions made.
- Hire service providers with appropriate expertise.
- Ensure that persons handling plan funds are bonded.
- Develop strong internal controls.
What are Party in Interest (PII)/Prohibited Transactions?
Under ERISA, a PII includes:
- A fiduciary or employee of the plan
- Any person who provides services to the plan
- An employer whose employees are covered by the plan
- An employee association whose members are covered by the plan
- Relatives of such persons
A prohibited transaction is a transaction between a plan
and a PII that is prohibited under Section 406(a) of ERISA. These transactions
- Sale, exchange or leasing of property
- Loan or other extension of credit (including late deposits of participant contributions)
- Furnishing of goods, services, or facilities
- Transfer of plan assets to a PII for their use or benefit
What Tasks should be Performed to Ensure Compliance with ERISA?
As the plan sponsor, you are responsible for:
- Reviewing the plan documentation for law changes and updating it as necessary.
- Enforcing the plan’s terms for participation, contributions, distributions, loans, and hardship withdrawals.
- Giving the required plan notices to the participants.
- Maintaining records for participant accounts.
- Investing the plan funds and monitoring any associated fees.
- Following up regarding uncashed benefit checks.
- Tracking “missing participants”.
- Filing all required forms and documents with the IRS or DOL.
- Determining that any required testing is performed.
Many of these duties may be outsourced to a third party service provider. The plan sponsor is responsible for monitoring any such service providers. This can be achieved by:
- Reading any reports they provide.
- Reviewing the service provider’s performance.
- Asking about policies and practices that are in place at the service provider.
- Following up on participant complaints.
- Obtaining and reviewing a SOC report.
What is a Service Organization Controls Report (SOC)?
There are several types of SOC reports. SOC I, Type 2 reports report on the operating effectiveness of the controls in place at the service organization and are specifically intended to meet the needs of entities that use the service organization (user entities) and the CPAs that audit the user entities’ financial statements (user auditors), in evaluating the effect of the controls at the service organization on the user entities’ financial statements. A SOC report includes information regarding:
- Types of services provided and transactions processed.
- Procedures used to provide services and process transactions.
- Related accounting records and supporting information.
- Processes used to prepare reports and other information.
- Control objectives and controls designed to achieve them.
What Internal Controls Should a Non-Profit Establish in the Management of their Employee Benefit Plan?
Controls should be established to cover each of the
following areas: (note the example controls listed in parentheses)
- Plan investments (Ensure total plan investments equal total participant investments.)
- Contributions received and related receivables (Ensure total contributions per plan reports equal contributions made to the plan.)
- Benefit payments (Review of hardship withdrawals for compliance with restrictions.)
- Participant data and plan obligations (Employee lists and data sent to third party administrators are reviewed for accuracy.)
- Administrative expenses (Invoices are appropriately reviewed and approved.)
- Investment return (Compare the plan’s total return to published sources.)
- Distributions (Review the listing for unusual items).
- Measurement and review of the plan’s financial performance (Monitor performance of plan assets or performance of investment options)
A lack of proper controls and/or oversight could result in misallocation of contributions to participant accounts, benefit payments to ineligible/incorrect individuals, and existence of ineligible or fictitious participants.
What are the Annual Reporting and Audit Requirements for Plans subject to ERISA?
IRS Form 5500, Annual Return/Report of Employee Benefit Plan, is the form used to file an employee benefit plan’s annual information return with the IRS and Department of Labor (DOL).It discloses information about the plan and its operations to the IRS, DOL, plan participants, and the public. The form is filed electronically by the last day of the seventh month after the end of the plan year. A two and one-half month automatic extension may be obtained by completing Form 5558.
IRS Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, is an IRS form that ERISA plans must use to report participants who have separated from service and have deferred vested plan benefits remaining in the plan following separation. The IRS will report this information to the Social Security Administration (SSA). SSA uses the information to notify applicants, or applicants’ beneficiaries, of Social Security benefits that they may be entitled to. These benefits are deferred vested benefits payable from a prior retirement plan in which the applicant participated. The due date for Form 8955-SSA will generally be the same as the due date for Form 5500, unless an extension is obtained. A two and one-half month automatic extension may be obtained by completing Form 5558.
Does the Plan Require an Audit?
Generally, if a plan has 100 participants at the beginning of the plan year, it will require an audit. Some plans frequently fluctuate between slightly more or less than 100 participants. The DOL provides relief for such plans and states that plans with between 80 and 120 participants at the beginning of the plan year may elect the same status that was used in the previous year. For example:
- A plan with 121 participants at the beginning of the plan year that did not have an audit in the prior year would be required to have an audit performed for the current year.
- A plan with 100 participants at the beginning of the plan year that did have an audit in the prior year would be required to have an audit performed for the current year. Alternatively, if the plan did not have an audit in the prior year, then the plan would not be required to have an audit in the current year.
- A plan with 79 participants at the beginning of the plan year that did have an audit in the prior year would not be required to have an audit performed for the current year.
The participant count is based on:
- Active employees eligible to participate in the plan regardless of whether they have elected to participate in the plan
- Retired participants with account balances
- Ex-employees with account balances
Two types of employee benefit plan audits are available:
- A full scope audit is an audit of the financial statements of the plan in accordance with Generally Accepted Auditing Standards.
- A limited scope audit is an audit in which ERISA allows the plan administrator to instruct the auditor not to perform any auditing procedures with respect to information prepared and certified by a bank or similar institution or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency.
What are the Most Common Issues Identified During Plan Audits?
- Participants’ investment options or salary deferral amounts are not in accordance with their stated elections.
- A lack of reconciliations or improperly prepared reconciliations by management resulting in missing contributions or improper allocations.
- Employees are not allowed to participate because they are “part-time.”Many part-time employees have enough hours to satisfy the hour requirement.
- Break-in-service – The organization didn’t allow participants back in the plan upon rehire in accordance with the plan document.
- Employee and employer contributions are incorrect due to the use of a definition of compensation that is different than what is specified in the plan’s provisions. For example, if compensation as defined by the plan includes bonuses, but employee deferrals were calculated excluding bonuses.
- Participant deferral percentages entered into payroll are inaccurate.
- A pay period of deferrals never received by the plan. Failure to timely remit such amounts constitutes a prohibited transaction.
- Payroll service was erroneously calculating the match by failing to treat Roth deferrals as a deferral eligible for match.
- Late remittances of employee deferral contributions.
- Not following hardship rules.
The high level of scrutiny from the DOL combined with the complexity of the regulations that govern ERISA employee benefit plans creates quite a compliance challenge for organizations that sponsor such plans.
Plan sponsors should ensure that:
- Those involved with the operation and administration activities of the plan have read the plan document and are familiar with the plan’s key provisions.
- All plan fiduciaries have been identified and are clear about their responsibilities
- Procedures are in place to monitor the plan’s service providers
The preceding article is an abstract from a seminar held in July by Maher Duessel.
The AICPA (American Institute of Certified Public Accountants) Auditing Standards Board has released a draft of a proposed new auditing standard for employee benefit plans that are subject to the Employee Retirement Income Security Act (ERISA). The proposed new standard addresses the auditor’s responsibilities in performing these types of audits and changes the form and content of the auditor’s report when management imposes a limited scope audit. In addition, the proposed new standard includes a requirement to report findings from procedures performed on specific plan provisions related to the financial statements. The proposed standard also prescribes certain new performance requirements that are focused on plan instrument provisions and would be required irrespective of the risk of material misstatement.
Reasoning for a New Reporting Standard
The AICPA proposal is a response to critiques of employee benefit plan audits which were raised by the Department of Labor in 2015. As detailed in the proposed new standard, the Department of Labor found one or more major deficiencies in 39% of the employee benefit plan audits it reviewed. Additionally, 17% of the auditor’s reports that were reviewed failed to comply with one or more of ERISA’s reporting and disclosure requirements. In response to this, the AICPA developed a six-point program to improve these audits along with launching a certification program to better train CPAs on performing these kinds of audits. (The author of this blog has the AICPA Advanced Defined Contribution Plans Audit Certificate).
The AICPA is seeking comments on the exposure draft of the proposed standard. The deadline for these comments is August 21, 2017.
The anticipated effective date of the proposed standard will be for audits of ERISA plan financial statements for periods ending on or after December 15, 2018.
Please note this summary of the proposed standard is not meant to substitute for reading it in its entirety.