Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Webinar Slides: Employee Benefit Plan Accounting Issues Update


Published on

Original air date:
Nov. 14, 2013
Repeat broadcast on Nov. 19, 2013
Register at

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).

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

Webinar Slides: Employee Benefit Plan Accounting Issues Update

  1. 1. 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
  2. 2. Before We Get Started…  To view this webinar in full screen mode, click on view options in the upper right hand corner.  Click the Support tab for technical assistance.  If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. #MHMwebinar 2
  3. 3. CPE Credit  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. #MHMwebinar 3
  4. 4. Today’s Presenters Hal Hunt, CPA MHM Shareholder 913.234.1012 | 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 | 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. #MHMwebinar 4
  5. 5. Today’s Presenters Ryan Rold, CPA MHM Senior Manager 602.650.6207 | 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 | 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. #MHMwebinar 5
  6. 6. Disclaimer 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. #MHMwebinar 6
  7. 7. Today’s Agenda 1 Hard to Value Investments 2 ERISA Audit Best Practices 3 Audit and Accounting Update 4 Employee Benefits Compliance Update 2013–2014 5 Q&A #MHMwebinar 7
  9. 9. Importance of Understanding Unit of Account Common Types of ALT Investments Unit of Account Limited partnership or private company security (equity) CCT (Common/collective trust fund) Interest in LP or individual security 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 #MHMwebinar CCT unit 9
  10. 10. Importance of Understanding Nature and Terms 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. #MHMwebinar 10
  11. 11. Alternative Investments & NAV  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) #MHMwebinar 11
  12. 12. Investment Contracts 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). #MHMwebinar 12
  13. 13. Investment Contracts & Fair Value Guaranteed Investment Contracts  Present value of future cash flows (straightforward calculation)  Model needs to consider terms of the contracts; no one-size-fitsall 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). #MHMwebinar 13
  14. 14. Investment Contracts 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 #MHMwebinar 14
  15. 15. Investment Contracts 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. #MHMwebinar 15
  16. 16. Private Company Securities – ESOPs 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) #MHMwebinar 16
  17. 17. Private Company Securities – ESOPs Private Company Securities  Valuation should consider the relative applicability of the valuation techniques used given:   Current market conditions  Quality, reliability and verifiability of the data used in each model  Comparability of public entity or transaction data used   Nature of the industry Additional considerations unique to the entity Consideration should be given to significant differences in valuation methodologies (why are they different?) #MHMwebinar 17
  18. 18. Private Company Securities – ESOPs 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. #MHMwebinar 18
  19. 19. Expanded FV Disclosures   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? #MHMwebinar 19
  20. 20. Fair Value - ASU 2011-4 “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 #MHMwebinar 20
  21. 21. Investments Reported at NAV This table sets forth a summary of the Plan’s investments reported at NAV, (ASU 2009-12) (ASC 820-10-50-6A). 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 Semiannually No redemptions in initial 3-year holding period 120 days 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. #MHMwebinar 21
  22. 22. Example 1: Quantifying Unobservable Inputs on Level 3 Assets Valuation Techniques and Inputs, Pending Content FASB ASC 820-10-55-103 #MHMwebinar 22
  24. 24. Discussion Topics  Preparing and planning for an audit  Fiduciary oversight and compliance with Plan document  Plan sponsor internal controls  Financial reporting #MHMwebinar 24 1
  25. 25. Preparing and Planning for an Audit  Establish audit milestones  Provide standard audit package  Obtain online access for audit team #MHMwebinar 25 2
  26. 26. Establish Audit Milestones  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 #MHMwebinar 26 3
  27. 27. Provide Standard Audit Package  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 #MHMwebinar 27 4
  28. 28. Obtain Online Access for Audit Team  Ability to run queries  Generate supplemental schedules  Increase precision in testing  Obtain information in real time #MHMwebinar 28 5
  29. 29. Fiduciary Oversight and Compliance with Plan Document  Audit evidence of fiduciary oversight  Timeliness of employee contributions  Participant loans  Compensation considerations  Hardship distributions #MHMwebinar 29 6
  30. 30. Audit Evidence of Fiduciary Oversight  Investment policy  Monitoring of investment performance  Monitoring of plan expenses  Key decisions are documented in committee meeting minutes #MHMwebinar 30 7
  31. 31. Timeliness of Employee Contributions  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 #MHMwebinar 31 8
  32. 32. Participant Loans  Improper amortization  Withholding for repayment not done timely  Deeming a loan defaulted  Updating interest rates #MHMwebinar 32 9
  33. 33. Compensation Considerations  Definition in plan document not being followed  Bonuses  Tips  Fringe benefits  Stock options  Member distributions #MHMwebinar 33 10
  34. 34. Hardship Distributions  Loans have not been exhausted  Lack of supporting documentation  Elective deferrals have not been suspended #MHMwebinar 34 11
  35. 35. Plan Sponsor Internal Controls  Responsibility for third-party service providers  User control considerations  Management’s tone at the top #MHMwebinar 35 12
  36. 36. Responsibility for Third-Party Service Providers  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 #MHMwebinar 36 13
  37. 37. User Control Considerations  Timeliness of contributions  Communication of eligibility  Fair value determination  Deferral election forms  Investment selection forms  Distribution request forms  Loan request forms and related agreements #MHMwebinar 37 14
  38. 38. Management’s Tone at the Top  Monitoring of contributions, distributions and loans  Review of third party reports  Communicate issues that arise to auditors #MHMwebinar 38 15
  39. 39. Financial Reporting  Level 1 investments  Level 2 investments  Level 3 investments  Fair value disclosures for Level 3 investments  Party in interest disclosures #MHMwebinar 39 16
  40. 40. Level 1 Investments  Unadjusted quoted prices for identical assets in active markets  Mutual funds  Common stocks #MHMwebinar 40 17
  41. 41. Level 2 Investments  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 #MHMwebinar 41 18
  42. 42. Level 3 Investments  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 #MHMwebinar 42 19
  43. 43. Party in Interest Disclosures  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 #MHMwebinar 43 20
  45. 45. 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. #MHMwebinar 45
  46. 46. 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. #MHMwebinar 46
  47. 47. 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. #MHMwebinar 47
  48. 48. 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. #MHMwebinar 48
  49. 49. 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 exemployer when they change jobs, and employers' automatic distributions of former employee account balances of less than $1,000. #MHMwebinar 49
  50. 50. 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. #MHMwebinar 50
  51. 51. 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. #MHMwebinar 51
  52. 52. 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. #MHMwebinar 52
  53. 53. 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. #MHMwebinar 53
  54. 54. 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. #MHMwebinar 54
  55. 55. Expense Reimbursement Arrangements (ERAs)     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. #MHMwebinar 55 2
  56. 56. Expense Reimbursement Arrangements (ERAs)  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. #MHMwebinar 56 2
  57. 57. Expense Reimbursement Arrangements (ERAs)  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. #MHMwebinar 57 2
  58. 58. Expense Reimbursement Arrangements (ERAs)  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. #MHMwebinar 58 2
  59. 59. Direct Filing Entities (DFEs)  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. #MHMwebinar 59
  60. 60. Direct Filing Entities (DFEs)  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. #MHMwebinar 60
  61. 61. Direct Filing Entities (DFEs)  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. #MHMwebinar 61
  62. 62. Direct Filing Entities (DFEs) 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. #MHMwebinar 62
  63. 63. Direct Filing Entities (DFEs) 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. #MHMwebinar 63
  64. 64. “Open” Multiple Employer Plans  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. #MHMwebinar 64
  65. 65. “Open” Multiple Employer Plans  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.” #MHMwebinar 65
  66. 66. “Open” Multiple Employer Plans  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. #MHMwebinar 66
  67. 67. “Open” Multiple Employer Plans  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. #MHMwebinar 67
  68. 68. 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. #MHMwebinar 68
  69. 69. 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 #MHMwebinar 69
  70. 70. 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 #MHMwebinar 70
  71. 71. 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. #MHMwebinar 71
  72. 72. 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. #MHMwebinar 72
  73. 73. 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, AUC 500  See AG 2.59-2.88 #MHMwebinar 73
  74. 74. 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) #MHMwebinar 74
  75. 75. AICPA EBP A&A Guide January 1, 2013 Edition     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 #MHMwebinar 75
  76. 76. AICPA EBP A&A Guide January 1, 2013 Edition  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. #MHMwebinar 76
  77. 77. AICPA EBP A&A Guide January 1, 2013 Edition  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 #MHMwebinar 77
  78. 78. Nonattest Services 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-toaccrual 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). #MHMwebinar 78
  79. 79. Nonattest Services  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. #MHMwebinar 79
  80. 80. Nonattest Services  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. #MHMwebinar 80
  81. 81. Nonattest Services  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. #MHMwebinar 81
  82. 82. Nonattest Services  Performing attest services often involves communication with client management regarding:   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 client’s selection and application of accounting standards or policies and financial statement disclosure requirements, 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. #MHMwebinar 82
  83. 83. Upcoming Events  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. #MHMwebinar 83
  85. 85. 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) #MHMwebinar 85
  86. 86. 2013 Year End Amendments  All Health Plans   Prohibition on waiting periods in excess of 90 days   No annual or lifetime limits on essential health benefits 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 #MHMwebinar 86
  87. 87. 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 #MHMwebinar 87
  88. 88. 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 #MHMwebinar 88
  89. 89. 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 #MHMwebinar 89
  90. 90. 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 #MHMwebinar 90
  91. 91. 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 #MHMwebinar 91
  92. 92. 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 #MHMwebinar 92
  93. 93. 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 #MHMwebinar 93
  94. 94. 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) #MHMwebinar 94
  95. 95. 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 #MHMwebinar 95
  96. 96. 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 #MHMwebinar 96
  97. 97. 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 #MHMwebinar 97
  98. 98. 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. #MHMwebinar 98
  99. 99. #MHMwebinar 99
  100. 100. If You Enjoyed This Webinar…  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 #MHMwebinar 100
  101. 101. Connect with Mayer Hoffman McCann mayer-hoffman-mccann-p.c. @mhm_pc mayerhoffmanmccann #MHMwebinar 101