webinar slides: employee benefit plan accounting issues update
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Original air date: Nov. 14, 2013 Repeat broadcast on Nov. 19, 2013 Register at www.mhmcpa.com The regulatory changes and compliance requirements facing employee benefit plan (EBP) managers continue to be significant. This webinar will cover several current and emerging accounting topics impacting employee benefit plans including certain implications of any changes in Department of Labor regulations. We will also look at potential implications of any proposed regulations. These changes will take some effort for plan stakeholders and service providers to address, and the cost of implementing these changes will be significant (but less than the costs of not implementing them correctly).TRANSCRIPT
Executive Education Series: Employee Benefit Plan
Accounting Issues Update Presenters:
Hal Hunt and Mike Loritz, MHM Shareholders Ryan Rold, MHM Senior Manager
Scott Behrens, Associate at Husch Blackwell
November 14, 2013
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Before We Get Started…
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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.
External participants will receive their CPE certificate via email immediately following the webinar.
CPE Credit
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Today’s Presenters
Hal Hunt, CPA MHM Shareholder 913.234.1012 | [email protected]
Hal leads MHM’s Employee Benefit Plan (EBP) Audit Practice. With over 25 years of diverse experience with EBP accounting, auditing and compliance issues, he is also a member of the firm’s Professional Standards Group as EBP subject matter expert. As the EBP National Practice Leader, Hal is responsible for providing internal training, along with providing technical support to engagement teams, serving as engagement quality reviewer and developing resource tools for our EBP audit professionals. He served on the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) Executive Committee and is currently a member of the EBPAQC ESOP Task Force.
Mike Loritz, CPA MHM Shareholder 913.234.1226 | [email protected] Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.
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Today’s Presenters
Ryan Rold, CPA MHM Senior Manager 602.650.6207 | [email protected] Ryan has over 13 years experience with companies ranging from small development-stage to those with an excess of $550 million in revenue. He has extensive experience with auditing employee benefit plans including defined contribution, defined benefit, health and welfare and employee stock ownership plans. Ryan is a member of the MHM ERISA Task Force and is responsible for approximately 30 employee benefit plan audits for the Phoenix office.
Scott A. Behrens 816.983.8393 | [email protected] As a member of Husch Blackwell’s Healthcare, Life Sciences & Pharmaceuticals industry group, Scott focuses on assisting clients in the creation and operation of employee health and welfare plans, retirement plans, deferred and equity compensation plans and employee stock ownership plans (ESOPs). He regularly offers strategies for establishing and maintaining legal compliance, including providing legal support during plan audits, assisting employers in the correction of documentary and operational errors, and filing Internal Revenue Service (IRS) determination letters. Scott regularly speaks on employee benefits issues, especially healthcare reform.
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The information in this Executive Education Series course is a brief
summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the
impact on your financial statements.
Disclaimer
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Today’s Agenda
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Hard to Value Investments
ERISA Audit Best Practices
Audit and Accounting Update
Employee Benefits Compliance Update 2013–2014
5 Q&A
HARD TO VALUE INVESTMENTS
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Common Types of ALT Investments
Importance of Understanding Unit of Account
Unit of Account
Limited partnership or private company security (equity)
Interest in LP or individual security
CCT (Common/collective trust fund) CCT unit
Hedge fund Interest in fund or Hedge fund unit
Insurance contracts (including GIC’s) Individual Contract
Synthetic GIC Underlying investments & Wrapper
Fixed income security Individual security
Managed fund (AKA “separate account”) Underlying investments
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The fair value is determined by the individual terms and conditions of the investment:
Review of investment agreements and other pertinent investment documentation.
Discussions with those at plan sponsor knowledgeable regarding investments.
Discussions with service providers including trustee/custodian, investment advisor, insurance company, etc.
Review of service provider reports including trustee/custodian, investment advisor, insurance company, etc.
Importance of Understanding Nature and Terms
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Reported at NAV in the vast majority of instances
Restrictions on redemption impact the fair value measurement within the hierarchy, but not the reported fair value (NAV)
Adjustments are recorded only if it is probable the plan will dispose of at an amount less than NAV
Underlying characteristics of assets held by the investment company does not impact the measurement (leveling disclosure)
Alternative Investments & NAV
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As defined by the ASC, investment contracts include: Traditional guaranteed investment contract (GIC), typically
issued by an insurance company Separate account GIC Bank investment contract (BIC) Synthetic GIC A contract with similar characteristics
Plans may hold stable value investments through direct contracts with issuers or through a specifically plan-managed account.
Plans may also hold stable value investments through ownership of bank collective trust funds or pooled separate accounts (which own investment contracts).
Investment Contracts
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Guaranteed Investment Contracts Present value of future cash flows (straightforward calculation)
Model needs to consider terms of the contracts; no one-size-fits-all method
MUST CONSIDER RESTRICTIONS ON REDEMPTION AND THE ABILITY TO TRANSACT AT FAIR VALUE!
Synthetic GICs For synthetic GICs, the calculation of fair value is determined
separately for the portfolio of underlying investments and the wrapper (sum of the two values equals for fair value of the synthetic GIC).
Investment Contracts & Fair Value
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Disclosure Nature of the contracts, how they operate, and methodology for:
Calculating the interest crediting rate
Key factors that could influence future average interest crediting rates
The basis for and frequency of determining interest crediting rate resets, and any minimum interest crediting rate
Relationship between future interest crediting rates and the adjustment to contract value reported on the statement of net assets
Investment Contracts
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Disclosure Events that limit the ability of the plan to transact at contract value with the issuer including:
A statement as to whether the occurrence of those events that would limit the ability of the plan to transact at contract value with the participants is probable or not probable.
A description of the events and circumstances that would allow issuers to terminate fully benefit-responsive investment contracts with the plan and settle at an amount different from contract value.
Investment Contracts
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Determining Fair Value If quoted prices in active markets or arm’s length transactions
have occurred for the entity’s equity securities, use that information first.
If not, then management should select the valuation method(s) that are appropriate for their industry, life cycle, etc.
A single valuation method may be appropriate
Or, it may be more appropriate to use multiple valuation methodologies (typically market and income approach)
Private Company Securities – ESOPs
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Private Company Securities Valuation should consider the relative applicability of the
valuation techniques used given:
Nature of the industry
Current market conditions
Quality, reliability and verifiability of the data used in each model
Comparability of public entity or transaction data used
Additional considerations unique to the entity
Consideration should be given to significant differences in valuation methodologies (why are they different?)
Private Company Securities – ESOPs
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Private Company Securities Market Approach Market value of equity (MVE) to net income or book value Enterprise value to EBIT Enterprise value to EBITDA Enterprise value to revenue Enterprise value to debt free cash flows Enterprise value to book value of assets
Income Approach Discounted cash flows Probability weighted cash flows
Typically, a combination of these methods is appropriate.
Private Company Securities – ESOPs
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ASU 2011-04 (ASC 820) requires certain disclosures with respect to how fair value is determined for Level 3 fair value measurements. Private equity securities Insurance/Investment contracts Other non-marketable securities
These changes may reduce the ability to rely on the limited scope certification Will the trustee/custodian provide information and certify the
required disclosures? If not, how will information be obtained?
Expanded FV Disclosures
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“Nonpublic entities” are exempt from certain disclosure requirements: A qualitative discussion of the sensitivity of the FV to changes
in unobservable inputs and the interrelationships between those inputs.
Transfers between Levels 1 and 2 of the FV hierarchy Disclosures applicable to fair value measurements required
for a plan when FV is disclosed but not recognized in the financial statements
Certain quantitative disclosures applicable to plan sponsor stock held by a private company ESOP
Fair Value - ASU 2011-4
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This table sets forth a summary of the Plan’s investments reported at NAV, (ASU 2009-12) (ASC 820-10-50-6A).
Investments Reported at NAV
a) Short-term investment fund strategies seek to invest in in high-quality, short-term securities. b) Equity index fund strategies seek to replicate the movements of an index of a specific financial market, such as the
Standards & Poor’s (S&P) 500 Index, regardless of market conditions. c) Venture capital funds invest in companies at their start-up phase primarily focused on the technology,
telecommunications, industrial and life sciences sectors.
Fair Value
Unfunded Commitment
Redemption Frequency
Other Redemption Restrictions
Redemption Notice Period
STIF fund (a) $xxx Immediate none
Equity index pooled separate accounts (b)
$xxx
Quarterly 60 days
Venture Capital Funds (c) $xxx $xxx,xxx Semi-annually
No redemptions in initial 3-year holding period
120 days
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Example 1: Quantifying Unobservable Inputs on Level 3 Assets
Valuation Techniques and Inputs, Pending Content FASB ASC 820-10-55-103
ERISA AUDIT BEST PRACTICES
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Preparing and planning for an audit Fiduciary oversight and compliance with Plan document Plan sponsor internal controls Financial reporting
Discussion Topics
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Establish audit milestones
Provide standard audit package
Obtain online access for audit team
Preparing and Planning for an Audit
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Set target date to provide standard audit package
Set target date to provide census data and other client prepared schedules/documents
Set target date for footnote & financial statement drafts
Set target date to issue and file 5500
Establish Audit Milestones
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Consider conference call with service provide and client to discuss information to be provided
Comprehensive package generated by custodian/third party administrator
Reduces numerous follow up requests
Provide Standard Audit Package
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Ability to run queries
Generate supplemental schedules
Increase precision in testing
Obtain information in real time
Obtain Online Access for Audit Team
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Audit evidence of fiduciary oversight
Timeliness of employee contributions
Participant loans
Compensation considerations
Hardship distributions
Fiduciary Oversight and Compliance with Plan Document
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Investment policy
Monitoring of investment performance
Monitoring of plan expenses
Key decisions are documented in committee meeting minutes
Audit Evidence of Fiduciary Oversight
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Employer is required to segregate employee contributions from its general assets as soon as practicable, but in no event more than the 15th business day following the end of the month in which amounts are withheld from their wages
Obtain understanding of contribution policy
15th business day is not a safe harbor
Analyze trends
Examine outliers
Timeliness of Employee Contributions
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Improper amortization
Withholding for repayment not done timely
Deeming a loan defaulted
Updating interest rates
Participant Loans
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Definition in plan document not being followed
Bonuses
Tips
Fringe benefits
Stock options
Member distributions
Compensation Considerations
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Loans have not been exhausted
Lack of supporting documentation
Elective deferrals have not been suspended
Hardship Distributions
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Responsibility for third-party service providers
User control considerations
Management’s tone at the top
Plan Sponsor Internal Controls
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Outsourcing doesn’t relieve ultimate responsibility
Fair value determination
Communication of fraud, noncompliance or uncorrected misstatements
SOC report not reviewed by plan sponsor
SOC report for the wrong period or not for the specific plan
Responsibility for Third-Party Service Providers
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Timeliness of contributions
Communication of eligibility
Fair value determination
Deferral election forms
Investment selection forms
Distribution request forms
Loan request forms and related agreements
User Control Considerations
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Monitoring of contributions, distributions and loans
Review of third party reports
Communicate issues that arise to auditors
Management’s Tone at the Top
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Level 1 investments
Level 2 investments
Level 3 investments
Fair value disclosures for Level 3 investments
Party in interest disclosures
Financial Reporting
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Unadjusted quoted prices for identical assets in active markets
Mutual funds
Common stocks
Level 1 Investments
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Inputs, other than quoted prices in active markets that are observable
Pooled separate accounts
Collective trust funds
Stable value funds
Corporate bonds
U.S. government securities
Level 2 Investments
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Inputs are unobservable and significant to the fair value measurement
Guaranteed investment contracts
Private company stock
Partnership interests
Land and businesses
Description of valuation techniques and inputs
Quantitative information about significant unobservable inputs
Level 3 Investments
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Need to have procedures to identify parties in interest
Determine if any transactions with parties in interest could be prohibited
Need appropriate disclosure of both
Continued scrutiny by Department of Labor
Footnote should reconcile to total administrative expenses and Schedule H
Party in Interest Disclosures
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AUDIT AND ACCOUNTING UPDATE
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DOL Audit Quality Study
The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) is responsible for ensuring audits of employee benefit plans are being performed in accordance with auditing standards and regulatory requirements.
The Office of the Chief Accountant (OCA) of the DOL’s EBSA has selected for review a statistical sample of 400 ERISA audits from the 2011 plan filing year.
The last published DOL audit quality study was of the 1992 plan filing year.
The sample will be stratified based on the number of ERISA audits performed by audit firms.
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DOL Audit Quality Study
According to the DOL EFAST database approximately 7,300 CPA firms performed over 83,000 ERISA audits in the 2011 plan filing year.
This includes approximately 3,700 CPA firms that performed only one or two ERISA audits, and approximately 1,500 CPA firms that perform between three and five ERISA audits.
Expectations are that nearly half the audits selected for review will have been performed by firms with very few ERISA audits.
Due to the specialized nature of these audits prior DOL inspections have indicated that these firms have a higher risk of deficient audits.
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DOL Audit Quality Study
On November 7, 2013, the OCA began sending out letters to sponsors of selected plans requesting the sponsor to have the plan auditor send copies of the audit workpapers to the OCA's offices for review.
The OCA does not anticipate the need to visit the plan sponsor's or auditors' offices to conduct its review.
The OCA will ask plan sponsors to respond to the inquiry letter within 15 days and encourages plan sponsors and auditors to contact them with any questions.
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DOL Audit Quality Study
If your plan audit is selected for review:
Verify that the OCA’s review is part of an audit quality study, and is not part of a DOL investigation or enforcement effort.
Notify/consult with others as required by MHM policy
Notify the OCA as soon as possible if unable to respond timely.
Auditors should review the guidance in AU-C Section 230 Audit Documentation, and AU-C 9230 Interpretation 1, Providing Access to or Copies of Audit Documentation to a Regulator.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
Plan administrators and auditors face accounting and auditing issues involving Lost Participants, including how to account for unclaimed benefits and stale uncashed benefit checks.
Historically the total dollar amount of unclaimed benefits and uncashed checks in employee benefit plans generally has not been significant, recent trends are contributing to an increase in unclaimed benefits and uncashed checks to participants and beneficiaries.
These trends include plans providing for automatic enrollment in 401(k) plans, employees holding multiple jobs during their careers and leaving their retirement accounts with their ex-employer when they change jobs, and employers' automatic distributions of former employee account balances of less than $1,000.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
Many plan sponsors may not even be aware that participants or beneficiaries have not cashed their benefit checks.
Uncashed checks may go undetected indefinitely or until there is a significant plan change, such as a change in service provider or plan termination.
When plan benefits are paid from a trustee or custodian’s bank account or the plan sponsor’s payroll account, this activity is not typically a part of the plan’s accounting records. When benefits are paid they are immediately deducted from plan assets.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
Plan internal controls need to identify and monitor uncashed checks so they are handled in accordance with the plan document and established administrative procedures and properly reported in the plan’s accounting records.
These controls typically include periodically obtaining an uncashed check detail report from the trustee or custodian and monitoring compliance with established administrative procedures to locate Lost Participants.
Uncashed checks may pose a potential fraud risk, especially in situations where the plan sponsor is not aware of their existence.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
The 2013 AICPA Audit and Accounting Guide, Employee Benefit Plans, suggests inquiring of plan management about any omitted balances that may be held by the plan sponsor, trustee, custodian, or third-party administrator.
Also see AG 5.125 and 5.127.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
It is unclear how they uncashed checks should be recorded—there is divergence in practice. Often uncashed checks are brought back into the plan as forfeitures
Some defined contribution retirement plans reinstate participant accounts for the Lost Participants. In situations where Lost Participants’ benefit checks have been outstanding for several years and the plan sponsor no longer maintains the data necessary to restore the account balances of those Lost Participants who are subsequently located, it may not be possible to reinstate those accounts.
Some defined benefit pension plans account for benefit obligations related to Lost Participants by re-establishing a benefit obligation for those Lost Participants whose checks go uncashed, while others consider the obligation fulfilled when the benefit check was cut.
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ERISA Advisory Council Hearings on Missing and Lost Participants (Lost Participants)
Recommendations made to the ERISA Advisory Council, include: the DOL should issue guidance clarifying whether uncashed
checks are considered plan assets under ERISA, the DOL should issue guidance clarifying how unclaimed
benefits and uncashed checks should be reported in the Form 5500, and
the DOL should clarify the plan sponsor's (fiduciary) responsibility for following up on unclaimed benefits and uncashed benefit checks.
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An account generally established by the Plan Sponsor (or Plan Fiduciary) and a Plan Service Provider (Recordkeeper) to receive and disburse recaptured revenue from or in connection with plan investments. (AKA, Excess Revenue Sharing Accounts, Recapture
Accounts, ERISA Spending Accounts) Terms and conditions associated with ERAs vary widely from
Service Provider to Service Provider and even with the same Service Provider, depending upon Plan size and other factors.
The focus on indirect compensation paid to service providers has drawn attention to these accounts.
These are increasingly more common in defined contribution retirement plans.
Expense Reimbursement Arrangements (ERAs)
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What can an ERA be used for? As a general matter, it must be used for the benefit of the Plan. It
cannot be used for the benefit of the Plan Sponsor. Use of the ERA or revenue that would be credited to the account for the benefit of the Plan Sponsor likely would constitute a Prohibited Transaction.
Generally used to pay (or to reimburse payment of) Plan expenses Payment of Recordkeeping Fees and Other Fees of the Service Provider Payment of Investment Consulting Firm Payment of Trustee Fees Payment of Legal and Accounting Fees Participant Education
Ordinarily not used to cover services that are not usually allocable as a Planwide expense, such as loan fees, transactions fees, or self-directed brokerage account fees.
May be allocated to participant accounts.
Expense Reimbursement Arrangements (ERAs)
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The structure of the agreement for revenue sharing amounts in excess of recordkeeping or other administrative charges is the key consideration in determining the appropriate financial reporting.
Revenue sharing amounts may be deposited into a DC plan and held in an unallocated account from which other plan expenses can be paid, with any amounts remaining at year end being allocated to participants, or
A service provider creates a credit in its books and records from which the plan sponsor, or some other fiduciary, can authorize disbursements to pay plan expenses. Although the service provider offering revenue sharing amounts serves more than one plan, for the same plan sponsor, additional issues arise about whether the revenue sharing amounts are being used for the benefit of the proper plan.
Expense Reimbursement Arrangements (ERAs)
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Need to understand the nature of these arrangements and to determine whether or not these accounts represent plan assets.
These accounts may not be apparent on the service provider reports or the plan’s financial statements.
These accounts may not have been accounted for or appropriately administered consistent with the applicable laws and regulations.
Auditors may determine that additional inquiries with management, their ERISA counsel or other specialists, and the service providers may assist in understanding these arrangements and the appropriateness of the plan’s accounting and reporting of these arrangements, including whether unused balances at year end constitute plan assets.
Expense Reimbursement Arrangements (ERAs)
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The DOL created the option for the manager of a pooled separate account, common or collective trust, master trust investment, or 103-12 investment entity (hedge fund, private equity, REIT, etc.) to provide information regarding the underlying assets of their funds to the DOL by filing a Form 5500 as a DFE.
When the fund manager files as a DFE, each ERISA plan investing in the fund may provide less detail regarding the fund on the balance sheet and Schedule H as well as the schedule of assets held.
Many fund managers file Form 5500 as a DFE as a courtesy to their ERISA investors.
Direct Filing Entities (DFEs)
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Fund manager files as a DFE:
Fund manager files a separate Form 5500 and applicable schedules for the fund.
Fund manager also supplies information about the underlying assets of the fund to DOL by attaching a copy of its audited financial statements (does not apply to pooled separate accounts or common/collective trusts) to the Form 5500.
Each ERISA plan investor must still file its own Form 5500; however, when reporting its investment in the fund, it must only report the fund as a single line item on its balance sheet (Form 5500 Schedule H) as well as the schedule of assets held.
Direct Filing Entities (DFEs)
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Fund does not file as a DFE:
Fund manager does not file as a DFE, each large (100 or more participants) ERISA plan investor in the fund must report its proportional interest in the underlying assets of the fund on its balance sheet for Form 5500.
This can result in additional questions being posed to the fund manager from the plan sponsor or from their outside auditor responsible for auditing the ERISA plan’s trust financial statements in order to have sufficient detail for reporting the investment on their Form 5500.
Direct Filing Entities (DFEs)
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Notification Requirement:
Whether it files as a DFE or not, the fund manager is required to notify its ERISA plan investors annually regarding whether it intends to file as a DFE.
The fund manager must also give ERISA plan sponsors the information needed to complete the Form 5500 for their plan within 120 days after the ERISA plan’s year end.
Direct Filing Entities (DFEs)
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Conclusion:
As a result of the DOL’s new matching program for Form DFE filers and ERISA plan Form 5500 filings, it is imperative that fund managers clearly notify their ERISA investors whether they will be filing with the DOL as a DFE in order to avoid notices being issued to their ERISA plan sponsor.
Direct Filing Entities (DFEs)
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In May 2012, the Department of Labor issued an Advisory Opinion 2012‐04A ruling that a multiple employer retirement plan (MEP) in which there is no preexisting relationship between the plan sponsors (sometimes called an “open” MEP) is not a single employee benefit plan under ERISA.
The Advisory Opinion deals with the MEP offered by TAG Resources LLC (as plan administrator), and sponsored by 401(k) Advantage LLC. Over 500 unrelated employers cosponsored the plan. Its 2010 Form 5500 reflects that the plan had nearly 10,000 participants and $63 million in assets.
“Open” Multiple Employer Plans
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The Opinion concludes: “There is nothing in your submission to support a conclusion that a bona fide association or group of employers is sponsoring the Advantage Plan.”
In other words, not one of those factors supports treating the open MEP in question as a single plan under ERISA.
The opinion focused on the absence of employer control and the lack of “any genuine organizational relationship between the employers.”
“Open” Multiple Employer Plans
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Some of the factors the DOL considers in determining whether such an association exists were:
How members are solicited;
Who is entitled to participate and who actually participates in the association;
The process by which the association was formed, the purposes for which it was formed, and what, if any, were the preexisting relationships of its members;
The powers, rights, and privileges of employer members that exist by reason of their status as employers; and
Who actually controls and directs the activities and operations of the benefit program.
“Open” Multiple Employer Plans
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The Advisory Opinion does not remotely suggest that open MEPs are illegal. They are simply separate plans under ERISA, as are trade association MEPs.
If operated in compliance with the Internal Revenue Code and plan terms, a MEP would be qualified and provide the tax benefits other qualified plans provide.
There are advantages and disadvantages associated with MEP co‐sponsorship, as there are with any other plan design.
The ruling, however, likely means that open MEPs should no longer promise avoidance of Form 5500 filing and audit requirements as benefits of participation.
“Open” Multiple Employer Plans
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Clarified Auditing Standards
Since 2004, the AICPA’s Auditing Standards Board (ASB) has aligned its agenda with that of the International Auditing and Assurance Standards Board. Each group intends to simplify, standardize and recodify its auditing standards to be easier to understand and more consistently applicable on a global basis.
The ASB completed its Clarity Project in 2011, and its new standards were effective for periods ending on or after Dec. 15, 2012.
The Clarity Project is the first complete recodification of U.S. GAAS since 1972. The new revised format for all existing auditing (AU) sections of AICPA Professional Standards includes an introduction, objective, definitions, requirements, and application and other explanatory material.
Wording is clearer, easier to understand, and consistent across international borders.
Among the more substantive changes will be the change in status of the 10 generally accepted auditing standards, the wording of the auditor’s standard report and standards for group audits.
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Examples of Clarified Standards
AU-C 210 Terms of Engagement AU-C 240 Consideration of Fraud AU-C 250 Consideration of Laws and Regulations AU-C 265 Communicating Internal Control Related Matters AU-C 402 Auditor Considerations Relating to An Entity
Using A Service Organization AU-C 501 Audit Evidence AU-C 505 External Confirmations AU-C 500 Using the Work of a Management’s Specialist AU-C 510 Opening Balances - Initial Audit Engagements AU-C 570 Going Concern
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Examples of Clarified Standards (cont.)
AU-C 580 Written Representations
AU-C 600 Audits of Group Financial Statements
AU-C 620 Using the Work of an Auditor's Specialist
AU-C 700 Forming an Opinion and Reporting on Financial Statements
AU-C 706 Emphasis of a Matter and Other Matter Paragraphs
AU-C 720 and 725 Other Information and Supplementary Information
AU-C 800 Special Considerations-Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
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Consideration of Laws and Regulations – AU-C 250
Requires inquiries of management, and when appropriate, those charged with governance
Requires inspection of correspondence, if any, from relevant regulatory authorities
Consider completeness by reading minutes, legal correspondence, etc.
Communication requirements
Best Practices- Make representation letter specific, i.e., "none", or sufficient details of nature of correspondence provided to be clear about completeness of matters, correspondence, etc.
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Auditor Considerations Relating to An Entity Using A Service Organization - AU-C 402
A user auditor is required to inquire of management of the user entity about whether the service organization has reported to the user entity any fraud, noncompliance with laws and regulations, or uncorrected misstatements.
If so, the user auditor is required to evaluate how such matters affect the nature, timing, and extent of the user auditor's further audit procedures.
Consider what contract with service organization says regarding "suspicious matters" to determine line of inquiry.
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Using the Work of a Management’s Specialist or an Auditor's Specialist- AU-C 500 & 620
An "auditor's specialist" now includes in-firm specialists as well as external specialists engaged by the auditor
Specialist is someone that possesses expertise in fields other than audit and accounting
Examples include valuation, actuary, health care, compliance matters
Management's specialists now covered in Audit Evidence, AU-C 500
See AG 2.59-2.88
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Clarified Auditing Standards
The effect of the clarified standards will vary Some changes will effect all plan audits
e.g., every auditor's report will change Some clarified matters may have already been applied by
firm e.g., communication of Other Control Deficiencies
Some clarified matters may require special consideration e.g., use of in-firm specialists
Applies to all non-issuer audits Will also affect Form 11-K audits since auditor must follow
both AICPA auditing standards (for the DOL) and PCAOB standards (for the SEC)
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Old EBP A&A Guide last issued over 20 years ago Had not been revised or amended other than for conforming
changes Significant changes have occurred Types of retirement plans offered Plan administration Types of investments Numerous changes to the rules and regulations by the DOL, IRS
and PBGC Professional Standards
ERISA—GAAP vs. GAAP—GAAP Divergence in practice Lack of consistency
AICPA EBP A&A Guide January 1, 2013 Edition
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Ordered similar to how an audit progresses—starts with planning
Audit risk assessment procedures have been separated from planning and general auditing considerations with numerous examples of identified risks of “What Can Go Wrong”
Change in service providers, partial plan terminations, etc.
Substantive audit procedures formerly in separate chapters moved into applicable core chapters
Investment guidance found in investment chapter and core plan chapters.
AICPA EBP A&A Guide January 1, 2013 Edition
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Next Steps
Continue to improve Guide
Add more on ESOPs, Multiemployer and Multiple Employer plans
Correct any mistakes (references, etc.)
May not have to go out for exposure—only FinRec and ASB clearance will be required
AICPA EBP A&A Guide January 1, 2013 Edition
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Preparation of Financial Statements, Cash-to Accrual conversions and Reconciliations Constitute Nonattest Services
In January 2013, AICPA’s PEEC adopted amendments to Ethics/Independence Interpretation No. 101-03, “Nonattest Services”
Activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement and therefore constitute nonattest services.
This amendment is effective for engagements covering periods beginning on or after December 15, 2014, (i.e. calendar year 2015 financial statements).
Nonattest Services
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Such activities would not impair independence provided the requirements of the interpretation are met.
The following is a Practice Tip found in paragraph 2.39 of the AICPA A&A Guide for EBPs, January 1, 2013 edition.
Nonattest Services
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Before performing nonattest services, the auditor should determine that management has agreed to: Assume all management responsibilities. Oversee the preparation of the financial statements, by
designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or expertise. The auditor should assess and be satisfied that such individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or reperform the preparation of the financial statements.
Evaluate the adequacy and results of the services performed. Accept responsibility for the results of the services.
Nonattest Services
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Before performing nonattest services, the auditor should establish and document in writing his or her understanding with the client regarding the objectives of the engagement, services to be performed, client’s acceptance of its responsibilities, auditor’s responsibilities, and any limitations of the engagement.
Nonattest Services
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Performing attest services often involves communication with client management regarding:
The client’s selection and application of accounting standards or policies and financial statement disclosure requirements,
The appropriateness of the client’s methods used in determining the accounting and financial reporting,
Adjusting journal entries that the member has prepared or proposed for client management consideration, and
The form or content of the financial statements.
These communications are considered a normal part of the attest engagement and would not constitute performing a nonattest service subject to this interpretation.
Nonattest Services
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December 12-13, 2013 - AICPA Employee Benefit Plans Accounting, Auditing and Regulatory Update - This conference provides you with critical updates, new guidelines, and regulatory information to help you successfully execute year-end audits.
May 13-15, 2014 - AICPA Employee Benefit Plans Conference Las Vegas, NV - This conference provides you with key updates on recent and proposed legislative changes and regulatory issues, the Risk Alert, any conforming changes to the audit guide and many tax sessions. There are also tracks for beginners, intermediate, and advanced sessions.
Upcoming Events
EMPLOYEE BENEFITS COMPLIANCE UPDATE
2013–2014
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2013 Year End Amendments
Qualified Retirement Plans
Code Section 436 funding based restrictions on distributions and accruals
DOMA amendment
Rev. Rul. 2013-17
Tech Release 2013-04
Discretionary amendments
In-Plan Roth Conversions Without Regard to Distributable Event
2014 Cutbacks (204(h) Notice)
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2013 Year End Amendments
All Health Plans
No annual or lifetime limits on essential health benefits
Prohibition on waiting periods in excess of 90 days
Prohibition on pre-existing conditions exclusion
Non-Grandfathered Health Plans
Cost sharing limitations
Out-of-pocket maximum tied to HDHP Rules (i.e., $6,350 for self-only coverage and $12,700 for other coverage)
Includes copays
Transition rule for separate Rx
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2013 Year End Amendments
Non-Grandfathered Health Plans (cont.)
Coverage for routine costs for clinical trials for the prevention, detection or treatment of cancer or other life-threatening conditions and diseases
Grandfathered Health Plans
Coverage of adult children to age 26 regardless of eligibility for other employer provided coverage
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2013 Year End Amendments
Small Non-Grandfathered Plans (i.e., <50) Coverage for “Essential Health Benefits”
Ambulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance use disorder services, including
behavioral health treatment Prescription drugs o Rehabilitative and habilitative services and
devices Laboratory services Preventive and wellness services and chronic disease
management Pediatric services, including oral and vision care
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2013 Year End Amendments
Small Non-Grandfathered Plans (Cont.)
Deductible cannot exceed $2,000 for self-only coverage and $4,000 for other coverage.
Discretionary Health Plan Amendments
DOMA amendment
Definition of spouse
Infertility treatments
Designation of measurement and stability periods
Variable and seasonal employees
Amendment or policy
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2013 Year End Amendments
Cafeteria Plans
$2,500 health FSA limit (administered in 2013, due in 2014)
Exchange related election changes (administered in 2013, due 2014)
Drop coverage to go to the Exchange
Commence coverage to avoid individual penalty
Carryover of $500 (may administer in 2013, due 2014)
Notice 2013-71
No grace period
HSA considerations
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Retirement Plan Considerations
403(b) Written Plan Document Required by December 31, 2009 50% reduction in VCP fee if filed by December 31, 2013
Determination Letters Cycle C (January 1, 2014)
EIN ending in 3 or 8 Governmental plans (who don’t elect Cycle E)
Restatements (i.e., no working copies) Rec. Proc. 2013-6, Section 7.05
VCP coverage ESOP reliance
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Retirement Plan Considerations
Cash Balance and Hybrid Plan Interest and Market Rate of Return Amendments
Due last day of plan year before plan year regulations become effective
Notices 2011-85 and 2012-61
Fee Disclosures – Round 2
Fiduciary regulations delayed
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Healthcare Reform Considerations
Eliminate free-standing HRAs
Tech. Release 2013-03
Retiree-only free-standing HRAs are okay, but “minimum essential coverage”
End cafeteria plans paying for individual coverage
Tech. Release 2013-03
Massachusetts Connector coverage
End traditional mini-medical plans
Issues with fixed indemnity plans
DOL ACA Implementation FAQ Part XI
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Healthcare Reform Considerations
Health FSA should be a HIPAA excepted benefit: Major medical plan Maximum reimbursement cannot exceed greater of:
Two times the participant’s salary reduction election $500 plus the amount of the participant’s salary reduction
election) Tech. Release 2013-03
Updated model COBRA notice includes Exchange information Voluntary Reporting Code Section 6055: Individual mandate (and credits) Code Section 6056: Employer mandate (and credits) Mandatory for 2015 (reported in 2016)
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HIPAA Considerations
Wellness Programs Incentive increases from 20% to 30% (50% for tobacco
cessation) 2 Types
Participation only Health contingent Activity based (e.g., walking) Outcome based (e.g., maximum BMI)
Reasonable alternative standard Participation: N/A Activity: Doctor certifies standard is unreasonably difficult or
medically in advisable Outcome: Unable to obtain
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HIPAA Considerations
Wellness Programs (Cont.)
Eligible for full reward at least once per year
Notice requirement
Omnibus rule
Impacts privacy and security policies and procedures, notice of privacy practice, and business associate agreements
Most changes effective September 23, 2013
Breach notification
Limitations on marking and sale of PHI
Email encryption
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HIPAA Considerations
Omnibus Rule (Cont.)
Business associate agreement updates
New: Comply with new rules
In effect January 23, 2013, update by earlier of:
Material change
September 22, 2014
Privacy Notice
Post by September 23, 2013
Written copy by November 23, 2013
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Disclaimers
Not legal or tax advice: This presentation is for informational purposes and is not intended, and should not be construed, as legal or tax advice.
Circular 230: Pursuant to U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly stated, any federal tax advice contained in this communication, including materials, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax related matters addressed herein.
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Join us for these related EES courses: Accounting & Management Issues of Employee Stock
Ownership Plans (recorded on 5/23/13)
ESOPs for the Construction Industry (recorded on 6/18/13)
Private Equity Firms: The Role of ESOPs in Your Deals (recorded on 10/24/13)
Read these related publications: MHM Messenger 11-13: FASB Proposal Affects Employee
Benefit Plans Employee Stock Ownership Plan Primer
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