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 Understanding and Reporting Late 401(k) Deposits: Late deposits of employee 401(k) contributions violate ERISA and are considered prohibited transactions; they must be reported on the Form 5500 (Schedule H for large plans, Line 10a for small plans filing 5500-SF). Two Paths to Correction Exist: Employers can rectify late deposits through self-correction, which requires … 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 403(b) Audit Disclaimer’s Origin: The requirement for ERISA-covered 403(b) plans to have audited financial statements began in 2009, but due to a historical lack of employer involvement with older contracts, plan sponsors often could not locate all plan assets. This impossibility led to auditors issuing disclaimed opinions on the financial statements’ completeness. … 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 Change in Participant Counting Method: Defined contribution plans filing the 2023 Form 5500 must now use the number of participants with account balances at the beginning of the plan year to determine their filing status (small-plan, under 100, or large-plan, 100 or more), a shift from the prior rule that counted all eligible … Continued