Driving the 5500 Highway: A Roadmap to 403(b) Success March 21, - - PowerPoint PPT Presentation

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Driving the 5500 Highway: A Roadmap to 403(b) Success

March 21, 2012

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The material appearing in this presentation is for informational purposes

• nly and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client

• relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

• services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.

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PRESENTERS

Catrina Blackwell Partner, Employee Benefit Plan Services Moss Adams LLP Gina Gurgiolo, JD, LLM Director, Technical Services Multnomah Group

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• Typical audit findings and how to avoid them
• Best practices for audit preparation
• New financial statement disclosures
• 2011 changes to the Form 5500
• Schedule C and its relationship to the final fee

disclosure regulations; and

• A “roadmap” to Form 5500 preparation success

TODAY’S AGENDA

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TYPICAL AUDIT FINDINGS AND HOW TO AVOID THEM

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• Inadequate oversight of service providers
• Deficiencies in internal controls
• Timeliness of contributions
• Limited understanding of

investments TYPICAL AUDIT FINDINGS

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• Frequently reconcile service provider reports to employer records
• Contributions per trust statement to payroll records
• Distributions per trust statement to detail listing or approval logs
• Investments per trust statement to Form 5500 draft
• Review for overall reasonableness based on what has
• ccurred during the year (investment performance,

layoffs, mergers, etc.)

• Read service provider SSAE 16 for deficiencies

that may affect the Plan

• Check that actual fees charged are in accordance

with agreements

• Follow up on participant complaints

OVERSIGHT OF PLAN SERVICE PROVIDERS

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VALUE OF INTERNAL CONTROLS

• They drive attainment of strategic business
• bjectives
• They prevent fraud
• They target and mitigate risk
• They help design processes with proper checks

and balances

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STRONG CONTROLS ARE IMPORTANT

• Need to ensure the plan information is complete

and accurate

– Participant enrollments – Dividends are timely and accurate – Plan assets are safeguarded – Participant access to data is property authorized and secured – Annual plan level financial statements are complete, accurate and timely

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PREVENTIVE CONTROLS

• Controls designed to prevent errors
• designed to deter problems before they arise
• mostly focused on authorization and input controls
• Examples of preventive controls
• hire qualified personnel
• segregate duties (deterrent factor)
• control access to data
• use well-designed documents (prevent errors)
• establish suitable procedures for authorization of

transactions

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DETECTIVE CONTROLS

• Controls designed to detect errors
• designed to detect problems soon after they arise
• mostly focused on reconciliation and review
• Examples of detective controls:
• reconciliations of contributions, distributions,

enrollment numbers to employer records

• spot checking risky areas
• duplicate checking of calculations

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SSAE 16 REPORTS

• Report on controls at the TPA/Custodian

– Detailed description of controls – Independent assessment of whether controls are suitably designed and placed in operation

• Type 2 report gives assurance that the controls

are in place and are operating effectively

• User control considerations – a must read for

plan management

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INTERNAL CONTROL FINDINGS COMMON TO BENEFIT PLANS

• Entity level controls
• No plan committee designated by board of directors
• No plan minutes taken of plan committee actions
• No investment policy statement
• Not in compliance with plan document
• Wrong definition of plan compensation
• All eligible employees are not participating in plan

These controls deal with the basic objectives of the plan, including monitoring performance and safeguarding of assets and also deal with complying with laws and regulations to which the plan is subject (Operational and compliance goals)

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INTERNAL CONTROL FINDINGS COMMON TO BENEFIT PLANS - cont.

• No controls over the plan’s financial reporting

process

• No reconciliation performed between participant account

details and custodian reports

• No reconciliation between payroll deferrals and amounts

reported on participant account details.

• Lack of documentation of controls surrounding

payroll and HR processes

These controls deal with the basic objectives of the financial close and report process of the plan, including completeness

• f data and disclosures

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INTERNAL CONTROL FINDINGS COMMON TO BENEFIT PLANS - cont.

• No controls in place over payroll and HR

processes

• No independent review of data input to verify

accuracy of data input in payroll

• No documentation of who initiated changes made to

participant data

• No independent review of data changes to employee

data in payroll system or recordkeeper system

• Lack of segregation of duties

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OTHER TYPICAL AUDIT FINDINGS

• Timeliness of contributions
• Prohibited transaction
• DOL hot button
• Limited understanding of plan investments
• Annuities
• Guaranteed investment funds/accounts
• Mutual funds

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BEST PRACTICES FOR AUDIT PREPARATION

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• Prepare early
• Prior year problems
• Review prior year report and update
• Understand any changes (FS and audit standards)
• Use timeline
• Due date in mind
• Regular updates
• Information available drives realistic due dates

BEST PRACTICES GETTING READY FOR THE AUDIT

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• Point Person
• Internal
• Audit firm
• Use document request list
• Assign tasks to appropriate parties
• Names and dates due
• Edit when dates are not met

BEST PRACTICES GETTING READY FOR THE AUDIT – cont.

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RECENT ACCOUNTING DISCLOSURES

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RECENT ACCOUNTING STANDARDS UPDATES (ASU)

• ASU 2010-25 – Reporting loans to participants

in defined contribution plans

• No longer an investment for financial statement

presentation

• Record as notes receivable from participants
• Fair value disclosures not applicable
• Still an investment for ERISA purposes
• Recorded as an investment on schedule H of form 5500
• Can still be certified
• Effective for 2010 and must be retrospectively

applied to all prior periods presented

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• ASU 2010-06 (Improving Disclosures about Fair Value

Measurements)

• Fair values must be disclosed by class
• Expanded disclosure of Level 3 activity. Separately present

gross purchases, sales, issuances, and settlements in reconciliation.

• Separately disclose significant transfers into & out of Level 1

and Level 2 and reasons for transfers – not expecting a lot of disclosure here.

• Disclose information about inputs and valuation techniques

used in Level 2 and Level 3 measurements.

• Effective for reporting periods beginning after 12/15/2009.
• Level 3 disaggregation required for years beginning after

12/15/2010 & interim periods within those years.

RECENT ACCOUNTING STANDARDS UPDATES (ASU) – cont.

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OTHER

• New audit guide came out fall 2011…
• 1991 last revision
• Many more disclosure examples provided
• Master trust – must now disclose full statement of net

assets in FS notes – example will be in new audit guide

• Enhanced disclosures of greater than 5% for undivided

interests and specific interests(divided interests) in master trusts and non-participant directed investments

• Corrective distributions – net with contributions and add

accounting policy

• Disclosures of fee arrangements
• Plan mergers – show transfers in/out after change in net

assets

• DB plan – no requirement to agree to Schedule SB – must

now meet standard receivable requirements

2011 FORM 5500 CHANGES

• Form 8955-SSA: reports participants with deferred vested benefits.

– With EFAST2 and public disclosure rooms, Schedule SSA was removed from Form 5500 Series so as not to disclose SSNs publicly. – New Form 8955-SSA was not ready in time for 2009 or 2010 filing years. – Form 8955-SSA due for 2009 and 2010 by Jan 17, 2012 or otherwise applicable filing deadline. – For 2011 filing year and beyond, Form 8955-SSA must be filed by Form 5500 deadline for subsequent years.

• Due 7 months from end of plan year, with 2.5 month automatic extension option via Form 5558.
• Form 5558 has been revised to allow election for extension of time to file Form 8955-SSA.

– File Form 8955-SSA electronically.

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2011 FORM 5500 CHANGES

• The instructions were updated to include the information in the EFAST2 FAQ explaining when a service

provider who manages the filing process for the plan can get EFAST2 signing credentials and submit the electronic Form 5500 for the plan.

• Schedule I and Form 5500-SF: used by plans with fewer than 100 participants at beginning of plan year.

– Schedule I and Form 5500-SF were revised to reference 7-day contribution remittance safe harbor. – No contribution remittance safe harbor in place for plans with 100+ participants.

• “As soon as administratively feasible” is the standard.
• Do not rely on 15th day of month following payroll month.
• Schedule C, MB and SB were revised for 2011, but no application to 403(b) plans.

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SCHEDULE C AND FEE DISCLOSURE REGS

• What is the relationship between Form 5500 Schedule C and the fee disclosure regulations?

– Schedule C reports certain fees and expenses paid out of plan assets. – Schedule C was revamped for the 2009 filing year in anticipation of fee disclosure regs, but they were delayed until finalized in February, 2012. – Covered service provider-to-plan sponsor disclosure under ERISA sec 408(b)(2) is due to plan sponsors

• n July 1, 2012.

– If the disclosure is not received, the plan sponsor must follow up in writing to delinquent covered service provider with 90-day response window. – If the covered service provider does not respond within 90 days of follow up letter, the final regs require termination of the covered service provider by the plan sponsor. – Plan sponsors must report noncomplying covered service providers on Schedule C. – Consider potential timing issues where Form 5500 is due July 31.

• May need to extend to Oct 15, 2012 (Form 5558).

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RECENT REGULATORY EXAMINATION ACTIVITY

• The IRS and DOL are targeting 403(b) plan sponsors for regulatory examinations.
• Plans are selected randomly or, less frequently, as a result of compliance check projects, reported

prohibited transactions and/or employee referrals.

• The primary focal points of IRS and DOL examination activity are:

– Operational compliance with the plan document (IRS/DOL)

• Compensation provisions
• Eligibility provisions
• Timely adoption of plan documents and required amendments

– Meeting other fiduciary standards (DOL)

• Exclusive benefit rule
• Prudent person rule
• Properly diversified investments

– 457(b) plans sponsored by tax-exempt organizations (IRS/DOL) – Timeliness of deferral segregation (IRS/DOL)

• Form 5500 requires plan sponsors to report instances of late deferrals.

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“ROADMAP TO SUCCESS”

• Maintain a compliance calendar.
• Schedule independent plan audit as early in the year as possible.
• Review prior year’s audit report to determine unresolved findings.
• Begin gathering 5500 information ASAP.
• Form/meet with Retirement Plan Committee to ensure proper fiduciary oversight of the plan, including

financial reporting.

– Understand/evaluate designated investment alternatives available in the plan. – Evaluate service providers and benchmark their fees to the market annually. – Demand fee disclosures ahead of July 1, 2012 deadline to avoid filing deadline interference. – Keep meeting minutes.

• Assess current-state internal controls, including preventative and detective controls–bolster as needed.
• Follow plan document provisions in all regards.
• Remit deferrals as soon as administratively feasible and avoid other prohibited transactions.
• Recommend that your Form 5500 preparer submit the 5500 through EFAST2 following your review.
• Expect and prepare for a regulatory audit by the IRS, DOL or both.

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DISCLOSURES

This presentation is not intended to be legal advice and should not be construed as such. Information relayed herein is representative of the Multnomah Group’s current understanding of the law. While the Multnomah Group has made every reasonable effort to ensure that the information contained herein is factual, we do not warrant its accuracy. Additionally, this presentation does not embody a comprehensive legal study, but provides a summary of the regulatory developments most typically applicable to our clients. As the information contained herein is general in nature, you are urged to contact your legal adviser with questions related to the specific application of these rules to your plan. Investment advisory services are provided by Multnomah Group, Inc., an Oregon corporation.

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QUESTIONS?

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Catrina Blackwell Partner, Employee Benefit Plan Services Moss Adams LLP catrina.blackwell@mossadams.com Gina Gurgiolo, JD, LLM Director, Technical Services Multnomah Group gina.gurgiolo@multnomahgroup.com