ebp audit and compliance update - calibre cpa group · • applies to financial statement audits of...

EBP Audit and Compliance UpdateFebruary 1, 2018

Accounting Standards Board AU-C 703 -Exposure Draft on EBP Reporting

DOL Proposal to Modernize and Improve the Form 5500 Annual Return/Report

Background

• AICPA Auditing Standards Board (ASB)developed the EBP Reporting Task Force in January 2015- DOL audit quality study report issued May 2015

1) 39% of the audits in study had one or more major deficiencies2) DOL had requested ASB set up task force to improve EBP audits

- Address forming an opinion and reporting on ERISA plan financial statements• ASB discussions – July 2015 – February 2017

Statement on Auditing Standards Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans subject to ERISA• Exposure draft issued in April 20, 2017 with 120-day comment period (August 21,

2017) extended September 29, 2017• A total of 108 comment letters were received by the AICPA• Applies to financial statement audits of employee benefit plans subject to ERISA• Intended to improve the value and relevance of the auditor’s report and the quality

of ERISA employee benefit plan audits• Proposed standard would be effective for audits of financial statements for periods

ending on or after December 15, 2018

Proposed AU-C 703

1. Requires the auditor to test certain plan provisions (regardless of the risk of material misstatement consideration).

2. Requirement to report findings from procedures performed on specific plan provisions

3. Incremental requirements regarding the engagement acceptance and written representations

4. Additional procedures relating to the Form 5500 filing

Proposed AU-C 703 – What is this?

5. Proposed new reporting model for audits of ERISA that imposes a limitation on the scope of the audit, as permitted by ERISA (limited scope audit)

6. Changes to the form and content of the auditor’s report for an unmodified opinion

7. Expanded descriptions of management’s responsibilities

8. Expanded reporting on the ERISA supplemental schedules

9. Required emphasis-of-matter paragraphs

Proposed AU-C 703 – What is this?

Reporting on Specific Plan Provisions

• Specific plan provisions relating to the financial statements- Required auditing procedures- Report findings from procedures

• Included to address diversity in practice and the work performed in an ERISA audit

• Can be part of the auditor’s report on the financial statements or in a separate report

• Similar to the report on compliance in a Yellow Book audit (Government Grant)

• Procedures and findings specific to these required areas would be required irrespective of the risk of material misstatement

• This will be in addition to the auditor’s current responsibilities under AU 265 “Communicating Internal Control Related Matters Identified in an Audit”

Reporting on Specific Plan Provisions (Report on Findings)

• Procedures relate to:- Participant eligibility - Disclosure of prohibited- Benefit payments transactions- Claim payments - Internal Revenue Code- Participating vesting compliance tests

provisions - Participants asset allocations- Employer and employee - Use of forfeitures

contributions - Recording of account activity

Procedures to Inform Reporting on Specific Plan Provisions

During our audit, we noted the following findings relating to whether the plan and plan transactions are in accordance with specific plan provisions. However, the audit was not designed to identify all instances when the plan and plan transactions are not in accordance with those specific plan provisions. Our opinion on the financial statements is not modified with respect to these findings.

We noted instances when vesting was not calculated in accordance with the plan instrument which resulted in the plan not paying the appropriate benefits.

Reporting on Specific Plan Provisions (Report on Findings- Example report)

Full Scope Report – What changes?

Current Reporting Proposed Standard ChangesIntroductory Paragraph Introductory Paragraph No changes

Management’s Responsibility for theFinancial Statements

Management’s Responsibility forthe Financial Statements of an Employee Benefit Plan Subject to ERISA

Same first paragraphAdditional paragraphspecific to EBPengagements

Auditor’s Responsibility Auditor’s Responsibilities No changes

Opinion Opinion No changes

Report on Supplementary Information

Other Matter Relating to theSupplemental SchedulesRequired by ERISA

Added content, including opinion on the form and content of the supplemental schedules

n/a Report on Specific PlanProvisions Relating to theFinancial Statements

New report on findings

Limited Scope Report

The percentage of plans electing limited scope audits has grown from about 46% in 1987 to over 70% in 2015.

• OIG recommended appeal of limited scope in 2010. • DOL requested the ASB to consider ways to provide more

transparency and address certain audit quality concerns when an ERISA-permitted audit scope limitation.


Current Reporting Proposed SAS ChangesIntroductory Paragraph Introductory Paragraph Revised Paragraph

Basis for Limitation on the Scope of the Audit

New paragraph to explain the scope limitation

Management’s Responsibility Management’s Responsibility for the Financial Statements and the Limitation on the Scope of the Audit

Same first paragraph Additional paragraph from full scope reportAdditional content specific to limited scope audit


Current Reporting Proposed SAS ChangesAuditor’s Responsibility Auditor’s Responsibility

(Including Responsibility for the Certified Investment Information)

Same content as full scope report plus added content with respect to the certified investment information and procedures performed

Basis for Disclaimer ofOpinion

n/a

Disclaimer of Opinion Auditor’s Opinion With the ERISA-Permitted Audit Scope Limitationon the FinancialStatements

New limited scope opinion


Current Reporting Proposed SAS ChangesReport on SupplementaryInformation

Other Matter Relating to SupplementalSchedules Required by ERISA

Same as full scope report plus explanation about procedure relating to the certified investment information

n/a Report on Specific PlanProvisions Relating to the Financial Statements

ASB Requested Feedback on AU 703 Issues for Consideration

1. Required procedures when an 5. Reporting internal control deficienciesERISA-permitted audit scope 6. Certain requirements for audits oflimitation is imposed ERISA financial statements and

2. The form and content of the related required report on specificauditor’s report on ERISA plan plan provisions relating to thefinancial statements with and financial statementsERISA-permitted audit scope 7. Required procedures relating to the limitation Form 5500

3. Modification to the opinion in the 8. Proposed new reporting standardindependent auditor’s report and amendments to other AU-C

4. Required emphasis-of-matter sectionsparagraphs 9. Proposed effective date

DOL Proposal to Modernize and Improve the Form 5500 Annual Report/Return

• In July 2016 the DOL/IRS/PBGC proposes significant changes to Form 5500

• Changes coincide to EFAST2 rebid in 2019• If adopted, it will be effective for all plan

years on or beginning after January1, 2019• Proposal includes 149 new or revised line items

and more than 20 new compliance questions• Over 200 public comment letters on proposal


(1) Modernizing financial information filed regarding plans; such as Investment categories;

(2) updating fee and expense information (3) enhancing mine ability of data filed on annual

return/reports;(4) requiring reporting by all group health plans covered

by ERISA, including adding a new Schedule J (Group Health Plan Information);

(5) Improving compliance through selected new questions regarding plan operations, service providers, and financial management


• New Compliance Questions on Form related to:

1) Unrelated Business income2) Number and value of un-cashed checks 3) How a plan satisfied certain non-discrimination testing

requirements4) The timely amendment for all required law changes 5) Identify when participant accounts are charged

directly for plan expenses6) Hardship distributions


• New Group Health Plan Reporting Requirements and Information

DOL proposes to expand reporting to all employee benefit plans providing group health benefits

(including plans that claims grandfathered status and retiree-only)

This includes all funds with Group Health Benefits regardless of size, funding etc.

Estimated to be over 2M additional filers.


New Schedule J -• Claims payment information, including:

• Counts of claims approved and denied, with a dollar amount of claims paid

• Counts of benefit claim appeals (and results of appeals)

• Counts of benefit claims adjudicated late• Counts of pre-service claims appealed (and results

of appeals)

Changes to the form would generally be effective for plan years beginning on or after January 1, 2019.


What can I do now?

• Plan sponsors should consider whether they currently have systems in place to capture the new data required by the proposed revisions.

• Plan sponsors should be prepared to answer the new compliance questions described in the new proposal to ensure the Plan’s are in compliance with those questions.

February 1 2018

Alternative Investments

Mary Margaret Prange, CPA | PartnerCalibre CPA Group PLLC7501 Wisconsin Avenue, Suite 1200 WestBethesda, MD 20814202.331.9880 phone | 202.331.9890 [email protected] |

Derrick E. Strosnider, CPA | PartnerCalibre CPA Group PLLC7501 Wisconsin Avenue, Suite 1200 WestBethesda, MD 20814202.331.9880 phone | 202.331.9890 [email protected] |

mailto:[email protected]


Topics

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1Environment

2Challenges and Risks

3Controls and Procedures to Mitigate Risks

4Audit Approach

What is an Alternative Investment?

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Typically private (i.e., nonpublic) investment vehicle or asset

Not listed on exchanges and no quoted market price

Strategies other than traditional long investment in stocks and bonds

Alternative Investments – Wide Range of Strategies

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The most common “Alternative” strategies:• Common/collective trusts, 103-12 entities, PSAs• Limited PartnershipsoReal estate, Private Equity, Infrastructure, Venture

Capital• Hedge Funds/Funds of Funds

Additional “Alternative” strategies:• Futures/Swaps• Options (buy/write, puts/collars, hedging)• Commodities

Alternative Investment Universe

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$7 Trillion Under Management

Worldwide (projected $13 Trillion by 2020)

$3.5 trillion in North America

$1.6 trillion in Pension Funds

Pension Funds-Increased by 10%

from 2016

Types of Alternative Investments

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Real estate – 41%

Private equity fund of funds – 18%

Hedge Funds – 12%

Infrastructure – 8%

Private equity – 7%

Fund of Hedge Funds – 5%

Other – 9%

Inherent Risk of Alternative Investments

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May not be registered

Lack of transparency• Confidentiality provisions in limited partnership

agreements

Valuation• Can be subjective• Methods include appraisals, cost basis, income stream or

a combination

May use leverage, shorting or hedging• Off balance sheet risks


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Liquidity• Investments difficult to sell and to exit – Assets

may be locked up (so very important to match cash flow needs with projected distributions)

• Private equity: typical 10-12 year life with very limited opportunities to cash out and distributions unpredictable

• Hedge funds: withdrawal suspensions are possible (make sure to footnote if that’s the case)


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Accounting Issues• Cost and Fair Market Value

• Custodians typically track cash inflows and outflows as increases or decreases in cost (in total – don’t account for investment expenses)

• Custodian doesn’t have accurate or timely information to record FMV• Accurate FMV may not be available until several months after year end • Alternative Investment year end may be different than Plan year end

• Distributions (could be net of fees)• Return of Invested Capital (RoIC) – reduction of cost basis• Return on Capital (RoC) - Income

• Investment expenses and fees• May be difficult to understand• Could be included in a capital calls, distributions or within investment itself• Important to track to understand and report investment expenses along

with returns


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Tax and Reporting Issues• For Partnerships often have Unrelated Business Income

– Federal and State Levels – for which 990T and applicable state returns need to be filed and taxes paid

• Timely tax payments are difficult as K-1s not received until well after year end• Final extension date for K-1s is September 15th

• Foreign disclosure forms• FBAR (own any foreign accounts over $10,000 in

total) and Form 926 (transfers made to foreign accounts in excess of $100,000)

How can Plan Professionals Help

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Investment Consultant• May assist in (i) evaluating manager and investment

attributes, (ii) understanding complexities and (iii) tracking cost basis, investment income and expenses (iv) other areas where named fiduciary does not have requisite expertise

Auditor• Assist with valuation and tax concerns and to minimize

the risk of qualified opinions later

Legal• Help understand legal responsibilities, review/negotiate

documents, comply with technical legal requirements

Accounting for Alternative Investments

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Key Factors necessary to understand the investment:• Legal structure (LP, LLCs, Commingled Fund, Group Trusts,

On-shore/Off-shore, UBTI, ASC 740 Tax Disclosures?)• Fund life, terms, restrictions and liquidity provisions• Fund cash flows (commitments, capital calls, distributions,

redemptions)• Transparency as to the assets held• Asset Valuation process (adequacy and independence

of the valuation process vs. subjective)• Market approach, income approach, cost approach

Accounting for Alternative Investments

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Key Factors necessary to understand the investment:• Income and cash flows (uneven distributions, self-

liquidating assets)• Return calculations (IRR vs. annualized returns)• Fees and costs (incentive fees, carried interest,

additional costs to determine FMV) – What is the REAL rate of return?

• Unpredictable timing of distributions• Fund Audits: Valuation lag, fund fiscal year end vs.

Plan fiscal year end – Interim financials? • Fiduciary Status (vs. non-plan assets)

DOL Guidance is Limited

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Despite repeated requests (including the Office of the Inspector General) by the ERISA Council, DOL and EBSA have not issued substantive guidance. 2013 Report recommended 1)propose and formalize guidance 2) improve procedures in enforcement reviews 3)improve data collection, analysis and targeting

DOL’s VFC Program available for distributions based on “improper valuations”. Corrections include:

• Properly valuing the asset and making additional distributions if the asset was undervalued

• Refile Form 5500


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Regional offices have pursued enforcement which began 7/1/08 with Boston Office Letter• Questioned whether a hard to value asset is per se a violation of

ERISA fiduciary responsibilities• Concern with investments valued at cost or based on a general

partner’s unaudited valuation• Noted the fiduciary failed to establish a process for valuing assets

Chicago Office 5/1/17 Letter to DC Plans

• Sent to those that reported on Schedule H that they had invested in investments whose value was not readily determinable

• Reminder of need to determine FV in order to accurately report participant account balances.


2008 ERISA Advisory Council: Hard to Value Assets

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DOL confirmed it would be impossible to satisfy fiduciary duties without

“Correct information concerning the value of

a plan’s assets”.

Council requested DOL to issue guidance

addressing the “complex nature and

distinct characteristics” of hard to value assets

Auditing Alternative Investments –Existence and Valuation

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Confirmations substantiate existence• Confirm # of units held, % of ownership

Other procedures necessary• Review PCAP and other statements • Review of audited financial statements• Understanding of how managers/advisors monitor

(site visits)• Frequency and type of reporting by managers• Review investment agreements• Compare cash activity to investor statements

Auditor Evaluation

• Auditor cannot audit what management has not accounted for

• If we can’t audit, issue a disclaimer or scope limitation

• Management can use investment advisors and consultants, but need to be able to independently evaluate and challenge the valuation

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Initial due diligence

Ongoing monitoring

Financial reporting controls

Initial Due Diligence

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Meetings with investment team

On-site visits

Contracts

Evaluation notes

Reference checks

Ongoing Monitoring

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Attend investor meetings

Site visits

Review periodic unaudited financial statements

Tracking commitments

Review of audited financial statements

Opinion Method of valuation

Financial Controls

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Reporting by investment advisor to Board

Comparison to policy

SOC-1 Report for Investment Consultant

Questions?

ALTERNATIVE INVESTMENTSTAX IMPLICATIONS

SCOTT HALLBERG, CPASENIOR TAX DIRECTOR

Typical Form of Investment• Hedge Funds Foreign Feeder (FF) Limited Partnership

• Partnerships

ALTERNATIVE INVESTMENTS:TAX IMPLICATIONS:

Partnership Issues• Typically, December year end• Partnership Returns and K-1 typically not issued

until late August or Early September• Partnership Returns with extension due

September 15• Detailed state information


Partnership IssuesType of Income

• Trade or business income Passive Income

» Loss carry forward vs. NOL

• Debt-financed Income Non-Passive Income


Form 990-T• Used to report UBTI• Due date (Calendar Y/E)

Pension plans – 4/15 Others – 5/15

• Extension due date(Calendar Y/E) Pension plans – 10/15 Others – 11/15

State Forms


Presentation Title

Partnership IssuesState Reporting

• File to preserve losses carry-forward• Some states & DC require a minimum payment even if

no income• Form not uniform

Corporate Return Trust Return State 990-T equivalent


Partnership IssuesOther Reporting Requirements

• Form 926 – Transfer of Property to a Foreign Corp. Cash transfers exceeding $100k Penalty – 10% of FMV with $100k limit

• Form 8868 – Transfers to Foreign Partnerships Transfer exceeds $100k or 10% ownership in Foreign Partnership $10k penalty for each year for failure to report


Cybersecurity for Retirement Plan Data

Allison Itami

February 1, 2018

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Overview What is Cybersecurity? What is Data? Is Data a Plan Asset?

ERISA Case law

Guidance for ERISA Plans Liability Protection & Insurance

Cybersecurity Incidents on the Rise High profile examples

Equifax U.S. Office of Personnel Management Target

Retirement plan context Ransomware

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What is Cybersecurity? Prevention techniques used to protect the integrity

of networks, programs and data from attack, damage, or unauthorized access

Cyber risks include: Ransomware Phishing Wire transfer email fraud Malware via external devices

4

What is Data? Retirement plan data includes

Names Dates of birth Addresses Social Security numbers Participant compensation Financial information

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Is Data a Plan Asset? Acosta v. Pacific Enterprises (9th Cir. 1991)

Test: To determine whether a particular item constitutes an “asset of the plan” it is necessary to determine whether the item in question may be used to the benefit of the fiduciary at the expense of plan participants or beneficiaries

Grindstaff v. Green (6th Cir. 1998)The asset must have some sort of inherent value, be

capable of the assignment of value, or otherwise be subject to market forces

Department of Labor Ordinary property rights

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Protection of Plan Assets Plan assets must be protected from theft. ERISA section 404 applies to plan fiduciaries.

Plan service providers should stay up to date and support fiduciary cybersecurity efforts.

RFPs.

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Guidance for ERISA Plans 2016 Advisory Council on Employee Welfare and

Pension Benefit Plans Report: “Cybersecurity Considerations for Benefit Plans” Develop a process to identify risks Develop a program to protect data State how breaches will be detected Establish a response plan to minimize damage

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Guidance for ERISA Plans SPARK Institute developed standards to help record

keepers communicate to plan consultants, clients and prospects the full capabilities of their cyber-security systems Sixteen control objectives

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Other Guidance for ERISA Plans American Institute of CPAs Systems and

Organizations Controls for Cyber Security An examination engagement performed in accordance

with the AICPA’s clarified attestation standards on an entity’s cybersecurity risk management program

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Other Guidance for ERISA Plans State privacy laws

Massachusetts Standards for the Protection of Personal Information of Residents of the Commonwealth (201 CMR 17.04)

Pre-emption is murky.

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Liability Protection & Insurance Inventory and Review of Plan Data

Is all plan data necessary? Can there be a data diet?

Who has access?

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Liability Protection & Insurance Greatest risk for plan fiduciaries lies in improper

selection and monitoring of service providers: Do service provider contracts contain notice provisions

and outline liability of provider with respect to data breaches?

Do contracts address cybersecurity readiness? Has the provider adopted the SPARK Best Practices, met the

GLBA standards, complied with AICPA standards?

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Liability Protection & Insurance Insurance

Fiduciary insurance triggered when lawsuit is filed Cyberinsurance triggered by a data breach

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Questions?

Allison Itami202-861-0159

[email protected]

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Legislative and Other Proposals to Save

Multiemployer Defined Benefit Pension Plans

Peter J. LeffAndrew K. LinMooney, Green, Saindon, Murphy & Welch, P.C.1920 L Street, NW, Suite 400Washington, DC 20036

What is the current multiemployer plan crisis?

With no intervention, 100 multiemployer plans could fail and become insolvent in the next 10 years.

Multiemployer pension plans in critical and declining status have $40 billion in assets and $100 billion in promised benefits.

1 million participants in critical and declining status plans.

PBGC’s multiemployer program projects to become insolvent by the end of 2025.

Value of claims for PBGC financial assistance, net of premiums received over the 2017-2036 period, is projected to be $101 billion.

2

What are the potential outcomes of an insolvent PBGC multiemployer program without government intervention? Drastic benefit cuts for up to 1 million participants and retirees.

Promised pensions of thousands of dollars a month reduced to almost zero.

Eroded faith in pension and other government promises.

Undermining of perceived security of single employer benefits.

Increase in market uncertainty.

Drag on economy from billions of pension dollars not spent by participants.

$101 billion in claims projected over next 20 years and projected PBGC insolvency in 2025.

PBGC estimates that there is over $600 billion in underfunding from 1,300 multiemployer pension plans (MEPP).

Central States Teamsters Plan projected insolvency risks entire MEPP system

Promised benefits may go fully unpaid if PBGC unable to maintain guarantees.

Failure of PBGC would result in reputational risk for the federal government, welfare relief demands and public pressure to restore benefits.

3

Has MPRA worked in preventing critical and critical and declining status Plans from heading towards insolvency? No. It has failed.

20 applications for a Suspension of Benefits submitted under MPRA:

4 have been approved by the Department of Treasury

9 withdrawn

5 denied, including the application filed by Central States.

2 under review

The PBGC has only granted one application under MPRA for a Partition to a very small plan.

PBGC still projected to become insolvent in 2025.

PBGC needs an additional $2.5 billion a year in premiums in order to remain solvent.

4

What are the legislative and other proposals to save critical and declining status multiemployer defined benefit pension plans?

Relaxing the stringent standards under MPRA and providing the PBGC with money to fund Partitions

A “Partition” transfers financial responsibility for a portion of the benefits under a critical and declining status plan to a successor plan that will get PBGC assistance so that the legacy plan can remain solvent.

Increasing PBGC premiums

Keep Our Pension Promises Act

Butch Lewis Act of 2017 and The Rehabilitation of Multiemployer Pensions Act

Curing Troubled Multiemployer Pension Plans Proposal

NCCMP’s Draft Federal Credit Proposal

5

What are the proposals to relax MPRA’s standards? NCCMP is pushing for regulations that would relax the strict actuarial standards that Treasury has imposed in order for

a plan to establish that it will be solvent after suspending benefits.

Treasury has been extremely strict on actuarial assumptions, and if Treasury disagrees at all with the plan’s assumptions, the application for a suspension of benefits is rejected.

Instead of rejecting applications after time, money and participant capital is expended, institute an informal process whereby Treasury will inform a plan whether the conditions that they are proposing for the suspension of benefits will be approved.

Plans are currently in the dark as to whether their applications will be granted.

PBGC has an informal review process whereby a pension fund’s partition plan can be evaluated prior to filing a formal application.

Have Treasury work with pension funds on developing suspension of benefits plans that will be approved.

Goal is to encourage more plans to seek MPRA relief and for more of that relief to be granted.

Provide the PBGC with funding to fund partition plans that increase PBGC financial obligations in the short term but save PBGC money over time.

On July 14, 2017, Treasury modified the submission and notice requirements to reflect what IRS has learned from the first year of processing MPRA applications. Under the revised procedure, Treasury will affirmatively ask for additional materials to correct any identified errors (instead of simply rejecting applications it finds fail to satisfy the MPRA suspension of benefits criteria).

6

What are options to increase PBGC premiums?

Type of Premium Key Advantages Key Disadvantages

Variable premium that depends on the funded position of the plan Links premiums to PBGC’s exposureLarger premiums for plans least able to afford them and may accelerate insolvency for troubled plans.

Variable premium that depends on the size of the benefits providedby the plan or the amount actually contributed to the plan

Premiums higher for plans that provide larger benefits or greater contributions

Plans paying highest premiums will typically not have higher guarantees due to the small size of the maximum guarantee. Creates incentive to make lower contributions to avoid higher premiums.

An amount that is assessed when a company withdraws from the plan Ties premium to events that often cause financial distress for plans

Fears over withdrawal liability are already a barrier to employer participation in the system. May not be able to collect the premium if the employer is bankrupt.

A premium that represents a portion of the investment gains of the plan Premiums are highest when plans are most able to afford them

Highly unpredictable revenue stream for PBGC and negatively correlated with risk of additional financial assistance.

Premium withheld from participant benefit paymentsPremiums are effectively paid by individuals receiving PBGC guarantee protection. Due to a large potential revenue base, a small withholding percentage could generate significant premium revenue.

Despite small size, it is equivalent to a benefit cut applied to all retirees.

7From: Honoring the PBGC Guarantee for Multiemployer Plans Requires Difficult Choices, American Academy of Actuaries, Issue Brief October 2016 at page 10.

Is there any assistance for the PBGC in the 2018 budget?

The proposed budget had called for additional premiums to be paid to the PBGC by underfunded multiemployer pension plans by adding a variable rate premium and exit premiums similar to existing rates for single employer plans.

The changes were projected to raise an additional $16 billion to keep the multiemployer program solvent for the next 20 years, plus another $5 billion that would come from having multiemployer plans pay premiums faster, so that they fall within the 10-year federal budget window.

Adding these new premiums would have required legislation which was not passed.

PBGC premiums for multiemployer plans for 2018 remain at $28 per participant and remain indexed to reflect inflation based on changes in the national average wage index, rounded to the nearest dollar, for future years.

8

What is the Keep Our Pension Promises Act (KOPPA)?

Sponsored in the Senate by Bernie Sanders (I-Vt) and in the House by Marcy Kaptur (D-Oh). No Republican sponsors to date.

Creates a Legacy Fund within the PBGC that is funded by partially repealing two tax breaks.

Creation of PBGC Legacy Fund for multiemployer plans. Underfunded multiemployer pension plans would apply to receive money from the Legacy Fund to help pay retirees the benefits they earned.

How is KOPPA paid for? The Legacy Fund created by KOPPA would be funded by partially repealing two tax breaks that benefit wealthy individuals. One of the measures would change the tax laws to ensure that rich real estate and art speculators would have to pay taxes when they trade one property for another. The second measure would tax amounts over $5 million that individuals have in their 401(k) plans or IRAs.

Goal of KOPPA is to ensure that retiree pensions are safe and relieve employers of withdrawal liabilities to ensure that they will keep contributing to multiemployer plans.

9

How would KOPPA work?

The sponsors of the bill believe that by closing these two tax loopholes, $39 billion will be brought into the Legacy Fund over the first 10 years.

Critical and declining status plans would be permitted to partition “orphan” participants (participants whose employers have withdrawn from the plan) to the PBGC leaving a healthier plan behind.

Money in Legacy Fund would be used to assist PBGC to pay orphans their accrued benefit.

Restores anti-cutback rule for accrued benefits.

AARP supports KOPPA.

The goal is to bring in revenue to solve the pension funding problem.

10

What is the Butch Lewis Act of 2017?

Legislation to provide critical and declining status multiemployer defined benefit plans with funds to meet their pension obligations and avoid insolvency.

Developed by the International Brotherhood of Teamsters.

Introduced on November 16, 2017 by Senator Sherrod Brown (D-Oh)(S. 2147). Richard Neal (D-Ma) introduced a companion bill in the House of Representatives, The Rehabilitation of Multiemployer Pensions Act (H.R. 4444).

Bill named for Butch Lewis, the former President of Teamster Local 100 and “a leader of the fight to save Teamster pensions” who dies in 2015.

The Butch Lewis Act is cosponsored by 13 Democratic Senators. No Republican Senators have co-sponsored it yet.

The Rehabilitation of Multiemployer Pensions Act is co-sponsored by 125 Democratic Representatives and 2 Republican Representatives, Peter King (R-NY-2) and Kevin Kramer (R-ND-At-Large).

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How does the Butch Lewis Act fix pension plans? The law creates the Pension Rehabilitation Administration (PRA), a new agency in the Treasury Department

PRA is authorized to issue Federally guaranteed bonds for the sole purpose of financing loans to critical and declining status plans, plans that have suspended benefits and some recently insolvent plans.

Money for the loans would come from bonds issued by the Secretary of Treasury and purchased by investors. PRA bonds are comparable to similar US Treasury securities.

The PRA will administer the Pension Rehabilitation Trust Fund (PRTF),

The PRTF is a separate US Treasury fund that will hold the proceeds of PRA issued bonds.

Use of PRTF assets is restricted to PRA loans to multiemployer pension plans and PRA operating expenses.

PRA loan interest and repayments are deposited in the PRTF.

PRFT assets are invested based on Treasury discretion.

PRA loans to pension plans have a term of 30 years, and are interest only for the first 29 years, with principal due in year 30.

The amount of the PRA loan equals the cost to fully fund the plan’s retiree and beneficiary liability, using the loan interest rate, at the time the loan is made.

Plans that receive PRA loans are required to invest the loan assets conservatively in an insurance company annuity contract, a duration matching portfolio, a cash matching portfolio or a similarly risked portfolio prescribed by the Sec’t of Treasury.

As a result of the loan, there will be no need to cut participants’ or beneficiaries’ benefits.

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Under the Butch Lewis Act, what must plans demonstrate in order to receive a PRA loan? In order to obtain a PRA loan, the pension plan must show

The loan will fully fund the plan’s retiree/beneficiary liability;

The plan will avoid insolvency during the term of the loan; and

The plan is reasonably expected to pay its benefit obligations, loan interest payments, and accumulate sufficient assets to repay the loan principal.

The PRA must approve or deny an application within 90 days of submission or it is deemed approved.

An application can only be denied if the information set forth in the application is clearly erroneous.

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What happens under the Butch Lewis Act if a plan cannot satisfy its obligations through the loan program? If a plan can demonstrate that a PRA loan alone will not allow the plan to

maintain solvency or become solvent, a plan can apply for PBGC assistance in conjunction with a PRA loan.

PBGC assistance will be equal to the percentage of fully funded retiree liabilities necessary to maintain solvency for a 30 year period, not to exceed the value of the PBGC benefit guarantee on the day the plan submits its application.

Congress would be required to provide funding to the PBGC to support a plan’s solvency.

Plans will still pay PBGC premiums.

If a plan were still to go insolvent even after the PRA loan and PBGC financial assistance, the PBGC would provide its guaranty for all participants in the plan.

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Under the Butch Lewis Act, are there additional requirements for a plan to obtain a PRA loan? The PRA loan is conditioned on the following:

The plan is prohibited from increasing benefits during the loan term.

The plan is prohibited from accepting collective bargaining agreements that reduce contributions during the loan term.

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What happens to withdrawal liability under the Butch Lewis Act?

If an employer withdraws from the plan during the term of the PRA loan, withdrawal liability will be determined for that employer as if it were a mass withdrawal.

No 20-year cap on the number of withdrawal liability payments.

Withdrawing employer must pay its share of reallocation liability (ERISA Section 4219(c)(1)(D)).

PBGC single employer plan termination actuarial assumptions must be used to value benefits when calculating withdrawal liability for employers that withdraw from plans during the term of a PRA loan.

A plan participating in the PRA loan program must count the benefits covered by the annuity contracts (or, if greater, the remaining payments due on the loan) when determining an employer’s withdrawal liability.

16

What happens under the Butch Lewis Act if a plan cannot pay back its loan?

The PRA must negotiate revised terms for repayment which may include

Installment payments over a reasonable period, and

Forgiveness of a portion of the loan principal.

17

What does the Butch Lewis Act hope to accomplish?

The goal of the Butch Lewis Act is that because of the loan, plans will be able to generate sufficient revenue after the 30-year loan period to pay back the loan to the PRTF and continue thereafter as a solvent plan.

Loans pay benefits.

Build assets with remaining funds to pay balloon.

Money to assist critical and declining status pension plans comes from the private sector and not from the government.

The bonds offered by the PRA will be attractive to investors because they are backed by the full faith and credit of the United States.

The incentive for employers is a reduction or elimination of withdrawal liability as the plan becomes solvent.

No benefit cuts to participants and beneficiaries.

18

What is the Curing Troubled Multiemployer Pension Plans proposal? Developed by UPS and supported by some unions and multiemployer plans.

Benefits reduced up to 20% uniformly for active, deferred vested and retired participants and beneficiaries.

US Government provides Multiemployer Pension Plans (MEPPs) with low interest, long-term loans.

First five years -- Interest only payments

30 year term for each loan

Up to three loans can be issued - one every five years (could mean up to 15 years of interest only payments)

Loans paid on a monthly basis to the plans to avoid financial crash risk.

Plans use the loans to pay benefits while leaving their assets invested to earn returns to pay benefits and repay the loans in the future.

Repayment of loans is backed by the MEPP Risk Reserve Pool (MRRP) which is funded by

$7/participant additional PBGC Premium on Plans

$2/month per active participant surcharge on Employers

$2/month per member (who are active participants) surcharge on Unions

$2/month fee on active participants in MEPPs

19

What are the arguments in support of the Curing Troubled Multiemployer Pension Plans proposal? Projection that the total program loans of $22-30 billion needed to fund plan underfunding

under the proposal compared to over $600 billion needed if the PBGC multiemployer program goes insolvent.

$22-30 billion in loans is fraction of existing $1.1 trillion of outstanding federal direct loans.

Government protection because of MRRP.

Projection that the MRRP will raise $390 million annually; $16 billion over 25 years.

MRRP will solve the cash flow problem critical and declining status plans have of more money going out than coming in annually.

MRRP will be conservatively invested in a separate trust and administered by the PBGC.

After 30-40 years, plans will be able to support their remaining benefit obligations and loan repayments based on preserved asset bases and earnings on those preserved asset bases.

Will preserve the PBGC’s ability to provide benefits to participants in insolvent plans.

20

Under the Curing Troubled Multiemployer Pension Plans proposal, how will a pension plan qualify for the loan? Application submitted to Treasury

Approval by Treasury within 30 days or deemed approved

Eligible if plan actuary certifies

Plan is in critical and declining status

Loan(s) will correct the plan’s funding issue

Loan(s) can be repaid

Approval is automatic so long as plan uses prescribed rate of return assumption and accepted investment strategy/policy

No participant approval process

21

What is the loan process under the Curing Troubled Multiemployer Pension Plans proposal? Initial loans provided within 60 days of application approval

Benefit payments must be cut 20% within 60 days after the loan application is approved

Remaining portions of the loan are made on a monthly basis as cash flow to pay benefits and to eliminate investment risk

Loans to be in the amount calculated by the plan’s actuary to pay the “shortfall” for the next 5 years.

The shortfall is equal to 5 times the projected income from contributions and earnings minus projected benefit payments (not reduced) and reasonable plan administrative expenses.

Loans made at a 1% interest rate and amortized over 30 years.

22

Under the Curing Troubled Multiemployer Pension Plans proposal, when would a pension plan receive a second and third loan?

At the end of the 5 years following the loan initiation, the plan’s actuary must certify whether the plan remains in critical and declining status.

If it is, the shortfall is recalculated (without including the benefit reductions) and a new 5 year loan amount is calculated and provided in monthly payments.

If the plan is no longer in critical and declining status, then the loan principle begins to be repaid.

Troubled plans may only apply for 3 consecutive loans. At the end of the third loan cycle (15 years), the principle and interest on the loan begin to be repaid no matter what the financial condition of the plan is at that time.

23

Under the Curing Troubled Multiemployer Pension Plans proposal, can benefits be restored? Benefit reductions remain in place until the plan is projected to become a

green zone plan with the benefits restored.

This could occur while the loan is being repaid.

Plans would be required to assess the ability to restore all or a portion of the benefit reductions annually.

24

Are contributions and employer withdrawal liability impacted by the Curing Troubled Multiemployer Pension Plans proposal? No.

Employer contributions will remain as they would under the plan’s red zone rehabilitation plan provisions.

Withdrawal liability calculations during the period of any outstanding loans will be made as if the loan and benefit reductions had not been made.

The proposal does not reduce withdrawal liability because of the loan.

25

Why is UPS advocating a proposal to save multiemployer pension plans?

UPS is obligated to the Central States Plan for backstop payments in the event benefits are cut.

UPS wants a vibrant Central States Plan for its employees and retirees.

UPS participates in over 10 other multiemployer plans.

UPS believes that once the Central States Plan goes insolvent, other multiemployer plans will go insolvent and the PBGC will run out of money.

26

What are the hurdles to the Curing Troubled Multiemployer Pension Plans proposal? 20% benefit cuts

Contribution requirements from participating employers, unions and participants

Concern that the MRRP will not be sufficient to cover MEPPs that cannot repay their loans

Assumed interest rate of 6.5% for plans repaying the loans is too high and should be lower (around 4%) to ensure plans remain solvent long-term

No sponsor for the proposal in Congress yet

27

What is the NCCMP’s Draft Credit Proposal?

Federally subsidized 30-year loans at a 1% interest rate.

Three alternatives to be considered by Congress.

NCCMP’s proposal recognizes that in order for the government to loan money to multiemployer plans, the plans must restructure their benefit payments.

NCCMP believes that their proposal maximizes the probability of success and has the best chance of being implemented by Congress.

28

NCCMP’s Draft Federal Credit Proposal: Alternative 1

No benefit reductions

Federal government would pay all credit subsidy costs (the estimated long-term cost to the government of a direct loan or loan guarantee)

No precedent for such a federal credit program

29


20% across the board reduction in benefits

Paid to the government to reduce the cost of the government subsidy

Government pays remaining subsidy costs

Loan program structure is consistent with the Federal Credit Reform Act

30


Similar to Alternative 2 in that it requires a 20% across-the-board benefit reduction, but then requires any additional amounts needed to achieve a zero credit subsidy to the government also be cut by the plan.

31

Are there any other legislative avenues to fixing multiemployer pension plan funding problems? Two Republican House members, David B. McKinley (W.Va) and Don Young

(Ark), recently signed a bipartisan letter urging Speaker of the House Paul Ryan (R-Wis.) to address the problems facing pensions.

Both McKinley and Young are members of a newly formed congressional pension caucus formed to find ways to stabilize financially struggling plans before they collapse and also bring down the PBGC.

The caucus could decide to support existing proposals or design its own legislative solution.

32

What is the Give Retirement Options to Workers (GROW) Act? Supported by the NCCMP

Bipartisan bill to allow pension plans to split and create a new composite plans with hybrid features

Slated to be introduced in Congress in coming weeks by Reps. Phil Roe (R-Tenn.) and Donald Norcross (D-N.J.).

Aimed at multiemployer plans that are financially healthy and want to remain so.

Not for critical and declining status plans.

Supported by both construction industry employers and unions representing construction and building trades workers.

The bill “combines key features” of traditional pensions and 401(k)-type plans.

Under the GROW Act, plan trustees would have the option of freezing their traditional pensions and prohibiting new members from joining. They could then create a new companion plan to provide future composite benefits where market and interest rate risks become the responsibility of participants in the composite plan.

What was previously one plan would become two—the old legacy plan and a new composite plan.

Existing employer contributions would be split between the two plans.

Trustees would be required to target the composite plan's funded ratio at 120 percent of the plan's projected liabilities. If the plan's funded ratio fell below 120 percent, the trustees would be required to cut the benefits enough to move the projected funded ratio back to the 120 percent level.

The composite plan wouldn't pay premiums to the PBGC and employees wouldn't get any benefit protection from that agency.

Employers that withdraw from the composite plan wouldn't owe any liability to the composite plan. 33

What are the prospects of passage of legislation to assist financially troubled pension plans? Both parties know that something must be done and are looking for a

permanent fix to the multiemployer pension funding problem.

Bill will have to be crafted in a manner that is not a “government bailout.” Congress needs assurance that loans will be repaid.

Teamsters and UPS have worked with PBGC and Treasury to get their support for their plan.

Passing any legislation in today’s day and age is difficult, but participants and retirees impacted by the cuts to their pensions have a lot of clout as many are concentrated in swing states that both parties need to win to maintain control of the Presidency and Congress.

34

Peter J. Leff

Andrew K. Lin

Mooney, Green, Saindon, Murphy & Welch, P.C.

1920 L Street NW, Suite 400

Washington DC, 20036

(202) 783-0010

[email protected]

[email protected]

35



UPDATE AND SUMMARYON NEW TAX ACT

SCOTT HALLBERG, CPA & SUBRINA L. WOOD, CPASENIOR TAX DIRECTORS

• UBTI Transportation Fringe Benefits Calculating each activity separately

• Excise Tax on Executive Compensation• Excise Tax on Investment Income of Private

Colleges and Universities

TAX CUTS AND JOBS ACTPROVISIONS AFFECTING EXEMPT ORGANIZATIONS

• UBTI Transportation Fringe Benefits

o Parking, commuter, and transit benefits- Up to Limits still excludable from income- Benefit will be subject to UBIT

Calculating each activity separatelyo Each activity calculated separately and must not be

less than -0-o Activity not definedo Prior year NOL grandfathered


• Excise Tax on Executive Compensation Compensation in excess of $1mil paid to

organizations five-highest paid employees taxed at 21%


• Excise Tax on Investment Income Applicable to private Colleges and Universities Only applies if over 500 students, 50% of students

located in US and have assets of $500k per full-time student

Excise tax rate – 1.4%


• New tax rates• Standard Deduction• Deductions and Credits• Family Incentives• Education

• Alimony• Federal Estate Tax• Alternative Minimum Tax• ACA

TAX CUTS AND JOBS ACTPROVISIONS AFFECTING INDIVIDUALS

• New Tax Rates 10; 12; 22; 24; 32; 35; 37 Old rates:

10; 15; 25; 28; 33; 35; 39.6 Top rate starts at $600k T.I. for Joint Return and

$500k for Individual Current tax rate for qualified dividends and

capital gains not changed


• Standard Deduction Increased to:

- $24,000 for MFJ- $18,000 for HOH- $12,000 for Single

Old amounts for 2018 would have been:- $13,000 for MFJ- $9,550,000 for HOH- $6,500 for Single


• Deductions and Credits Mortgage Interest:

- Limited to $750k of acquisition indebtedness- Existing loans grandfathered under $1mil limit- No interest on home equity indebtedness


• Deductions and Credits State and local taxes:

- Income, real estate taxes and personal property taxes limited to $10k

- Prepayment in 2017 of income taxes prohibited- Prepayment in 2017 of property taxes not deductible

unless assessed before 2018


• Deductions and Credits Miscellaneous itemized deductions All miscellaneous itemized deductions subject to

2% floor eliminated- Includes unions dues and employee business expenses

Medical Expenses – threshold lowered to 7.5% from 10% for 2017 and 2018


• Family Incentives Increases current child tax credit from $1,000 to

$2,000 per child- $1,400 would be refundable credit

Also allows for nonrefundable credit of $1,500 for dependents other than children


• Education Did not renew above-the-line deduction for

education expenses – expired 2016 Retains student loan deduction


• Alimony Repeals deduction and income inclusion Only applies to divorce or separation instruments

executed after 12/31/2018


• Federal Estate Tax Exclusion Increases exclusion to double amount under

prior law 2018 inflation amounts will be $11mil Also applies to Gift Tax and Generation Skipping

Transfer Tax


• Alternative Minimum Tax AMT retained Exemption increased to $109,400 for joint filers

and $70,300 for others Phase-out levels increased to $1mil for MFJ and

$500k for others Corporate AMT eliminated


• ACA Repeals Affordable Care Act individuals shared

responsibility requirements


• New tax rates• Alternative Minimum Tax• Small Business changes• Section 179 and Bonus

Depreciation• Amortization of Research

and Experimental expenditures

• Changes to definitions of ‘listed property’ and

‘qualified property’• NOLs• Sexual harassment

payments• Disallowed Deductions• Family leave credits

TAX CUTS AND JOBS ACTPROVISIONS AFFECTING CORPORATIONS

• New tax rate• Old rates:

• 15; 25; 34; 35 with personal service companies disallowed from using the graduated corporate rates below 35%

• New rate:• Flat 21 with no special rate for personal service companies• Repeals the maximum corporate tax rate on net capital gain

as obsolete• Reduces the dividend received deductions from 80% to 65%


• Alternative minimum tax is repealed

• Allows prior year minimum tax credit to offset regular tax liability

• 50% of the excess over the amount allowed as a credit is refundable after 2017 and before 2022

• 100% of the excess over the amount allowed as a credit is refundable beginning 1/1/2021

• There is no expiration


• Small Business changes• New definition – $25M average gross receipts or

less for the prior three years (indexed for inflation)• Cash method of accounting• Exempt from accounting for inventory• Exempt from the UNICAP rules on capitalizing

direct and indirect costs related to real or tangible property.

• All require Form 3115 – Change in Accounting Method


• Section 179 Expensing• Increased to $1M• Phaseout threshold increased to $2.5M

• Both amounts are indexed for inflation• Qualified real property

• All qualified improvement property• Certain improvements made to nonresidential real

property


• Bonus depreciation• Extended through Dec 31, 2026 (or Dec 31, 2027

for longer production period property)• Includes film tv and live theatrical productions

released or broadcast after Sep 27, 2017• Includes used property that was not used by the

taxpayer before the taxpayer purchased it• 100% bonus depreciation (full expensing) placed

in service after Sep 27, 2012 through Dec 31, 2022


• Amortization of Research and Experimental Expenditures • Prior law could expense or amortize• Includes software development expenditures• Must amortize over a five year period (15 years if

conducted outside of the US)• After disposition or retirement of the property any

remaining basis continues to be amortized over the remaining amortization period.


• Luxury Autos and other listed property• Increased depreciation limits

• Initial year $10,000• Second year $16,000• Third year $9,600• Fourth and later $5,760

• (indexed for inflation)

• Computers and peripheral equipment –removed for the definition of listed property


• Net operating loss deduction• Limited to 80% of taxable income• NOLs may not be carried backs • NOLs may be carried forward indefinitely• NOLs of farming and of property and casualty

insurance companies may be carried back 2 years and forward 20

• Applies to NOLs arising after Dec 31, 2017


• Disallowed Deductions • Local lobbying expenses• Entertainment expenses• Moving expenses• Qualified Transit expenses• Business interest deduction limitation• Domestic Production Activities• Sexual harassment and abuse expenses

• But only when subject to a nondisclosure agreement


• Family Leave Credits• Employer voluntarily providing paid family leave

and medical leave to employees can claim a general business credit for a percentage of the wages paid to qualifying employee

• Provide at least two weeks and compensate a minimum of 50% of their wages

• Credit ranges from 12.5% to 25% of the cost• Employees – at least one year and paid less than

$72,000• Tax years beginning in 2018 only


ebp audit and compliance update - calibre cpa group · • applies to financial statement audits of...

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