Art of the Qualified Plan Audit

In Summary A Year of Service Is Negotiable, Not Literal: A “Year-of-Service” in retirement plans often does not equal 12 months, as employers can choose from various counting methods (Actual Hours, Elapsed Time, Equivalency) to define eligibility and vesting, essentially making a year “whatever the employer needs it to be.” Counting Methods: Different methods offer … Continued

In Summary Differences in Distribution Reporting: There are inconsistencies between GAAP and Form 5500 instructions, particularly concerning benefit distributions. Form 5500, Schedule H includes benefits payable (approved but unpaid claims) as a liability, while accrual basis GAAP financial statements generally report distributions when paid, aligning with Forms 1099-R. Treatment of Corrective Distributions Varies: Accounting for … Continued

In Summary Accrual Basis Plan Compensation vs. Corporate Accounting: Accrual basis compensation for a retirement plan doesn’t necessarily align with the employer’s accrual basis compensation on corporate books, as many plans link the contribution obligation to the actual issuance of paychecks (which corresponds to W-2 wages received), rather than the dates the wages were earned. … Continued

In Summary Audit Threshold Change: There was a 2023 change to the Form 5500 participant count rule, which now excludes eligible participants who do not have an account balance on the first day of the plan year from the audit-triggering count. Timing Discrepancies: Various scenarios—including plan mergers, trade date vs. settlement date differences, and spinoffs—create … Continued

In Summary The Honor System in Small Retirement Plans: Due to changes in participant counting rules, many small plans are exempt from mandatory annual financial statement audits, relying instead on a “trust, but verify” honor system. This places a significant responsibility on plan sponsors for oversight. Verification Through Self-Audits or Agreed-Upon Procedures: Plan sponsors are … Continued

In Summary ERISA vs. FASB ERISA: Section 3(14) defines a “party-in-interest” more broadly than FASB ASC 850’s definition of “related parties,” encompassing various individuals and entities connected to an employee benefit plan, including fiduciaries, service providers, employers, and certain owners or relatives. Reporting and Disclosure Requirements for Transactions: Transactions with parties-in-interest (excluding statutory exemptions like … Continued

Don’t Stand, Don’t Stand So, Don’t Stand So Close to Me Unlike unwritten rules referring to the social norms, customs, and expectations that guide behavior in various contexts, such as maximizing personal space in an elevator, or bringing a small gift when invited to someone’s house, SECURE 2.0 brings rules that must be followed effective … Continued

In Summary Plan Qualification and Tax Treatment: Retirement plans established in Puerto Rico (PR) receive favorable U.S. tax treatment under ERISA Section 1022(i). Plans covering only PR residents (1022(i)(1)) are exempt from U.S. taxation on trust income, while plans electing full U.S. compliance (1022(i)(2)) can cover both U.S. and PR employees. Key Regulatory Differences Must Be … Continued

On January 31, 2024, Hacienda, (the Puerto Rico Department of the Treasury) issued Internal Revenue Circular Letter No. 24-01 (CL IR 24-01) announcing the 2024 limits for Puerto Rico-qualified retirement plans according to Section 1081.01(h) of the Puerto Rico Internal Revenue Code of 2011, as amended. Following are the applicable 2024 limits for qualified defined … Continued

In Summary Correction Options for Retirement Plan Errors: The various methods available for calculating corrective contributions and their associated earnings, aiming to make participants whole, range from using actual individual investment returns (Option 1) to employing reasonable estimates like the plan’s weighted average rate of return (Option 3). When to Use Simple Estimates and the … Continued