Melissa M. Wolf, CPA (570) Employee Benefit Plan Auditing and Regulatory Update 2012

Transcription

1 Melissa M. Wolf, CPA (570) Employee Benefit Plan Auditing and Regulatory Update 2012

2 Agenda ASU SOC1 (Formerly SAS 70), SOC2 and SOC3 Department of Labor Regulatory Update Tax and Regulatory Update and Audit Implications of Compliance General Trends In Benefit Plans 1

3 Accounting Update A Review of Fair Value ( FV ) Measurements and Disclosures ASU (2010) Improving Disclosures About Fair Value Measurements Expanded disclosure of Level 3 Activity No new standards effective for fiscal years ended 2011 except ASU Level 3 Activity Presentation on a gross basis rather than net basis 2

4 SOC1 (Formerly SAS 70), SOC2 and SOC3 3

5 SOC1 (Formerly SAS 70) Reporting on Controls at a Service Organization and Application of the Report Implemented to prevent, detect and correct errors or omissions in the information provided to user entities SOC1 SSAE 16 (same level of evidence and assurance as in a SAS 70) Restricted use report Type I» Type I addresses the description presents fairly, in all material respects, the relevant aspects of the service organization s controls that had been placed in operation as of a specified date 4

6 SOC1 (Formerly SAS 70) New Standards and New Names SOC1 SSAE 16 (same level of evidence and assurance as in a SAS 70) (cont d) Restricted use report Type II» Type II addresses whether such controls were suitably designed to provide reasonable assurance that the specified control objectives would be achieved of those controls were complied satisfactorily, and whether the controls that were tested were operating with sufficient effectiveness to provide reasonable, not absolute assurance that the related control objectives were achieved during the period specified 5

7 SOC1 (Formerly SAS 70) New Standards and New Names SOC1 SSAE 16 (same level of evidence and assurance as in a SAS 70) (cont d) Reports on controls at a service organization relevant to a user entity s internal control over financial reporting Conceptually the same as SAS 70 Contents» Description of service organization s system» CPA s opinion on fairness of description, suitability of design, operating and effectiveness of controls 6

8 SOC2 & SOC3 New Standards and New Names SOC2 Generally a restricted use report Type I and Type II Reports on controls related to compliance and operations Security, Availability, Confidentiality, Privacy, Contents Same as SOC1 SOC3 General use report (with public seal) Reports on controls related to compliance and operations No detail provided in reporting difference between SOC2 and SOC3 (about 200 pages) 7

9 Department of Labor ( DOL ) Regulatory Update 8

10 Department of Labor Regulatory Update Beginning in 2006, the U.S. DOL has proposed several regulatory revisions designed to reveal hidden compensation and conflicts of interest among plan service providers. Proposed amendments to DOL regulation section b-2(408(b)(2)) will require disclosure of any and all conflicts of interest, as well as compensation received in connection with a provider s services to a plan. 9

11 Department of Labor Regulatory Update 408(b)(2) Regulations Effective date July 1, 2012 Full disclosure of all services to be provided under the agreement Will help fiduciaries determine a contract s reasonableness (new transparency to the process) Clarification of reasonable arrangement» In writing (no prescribed format)» Disclosure obligations must be met before or at the time the plan enters into a service arrangement (comprehensive disclosure) 10

12 Department of Labor Regulatory Update 408(b)(2) Regulations Will require disclosure of all compensation and conflicts of interest Establishes disclosure burden on service provider 11

13 Department of Labor Regulatory Update 408(b)(2) Regulations Consequence of Non-Disclosure Will warrant a prohibited transaction Contract will not be considered reasonable and therefore violates the regulation Plan Fiduciary violates Regulation 406(a)(1)(c) by participating in a prohibited transaction Service provider is a disqualified person as defined, under Internal Revenue Service prohibited transaction rules and subject to excise taxes under Codes section

14 Department of Labor Regulatory Update 408(b)(2) Regulations Service Provider Who provides any service to a plan as a fiduciary under section 3(21) of the Employee Retirement Income Security Acts of 1974 ( ERISA ) or under the Investment Advisors Act of 1940 Who provides banking, consulting, custodial, insurance, investment advisory (plan or participants), investment management, recordkeeping, securities or other investment brokerage or third party administration 13

15 Department of Labor Regulatory Update 408(b)(2) Regulations Service Provider Who receives or may receive indirect compensation or fees for the following services: Accounting Actuarial Appraisal Auditing Legal Valuation 14

16 Tax and Regulatory Update and Audit Implications of Compliance 15

17 Tax and Regulatory Update and Audit Implications of Compliance Common Areas of Non-Compliance Merger Considerations Use of Forfeitures 403(b) Plan Considerations Unrelated Business Taxable Income Schedule C Reporting Late Remittances Employee Deferral Contributions Defined Benefit Plans New Minimum Funding Rules 16

18 Tax and Regulatory Update and Audit Implications of Compliance Merger Considerations Technical exposure Risk of inconsistent or incorrect plan terms Discrimination testing possibility of disqualification by the IRS Final Form 5500 filing if there is a short plan year as a result of the Company transaction Economic exposure - potentially additional payments Filing of Form 5500 Voluntary filing with IRS for determination letter on termination Provides comfort - termination 17

19 Tax and Regulatory Update and Audit Implications of Compliance Use of Forfeitures (must comply with plan document terms) Reduce future employer contributions Pay plan expenses Allocation as an additional contribution to participants Similar to profit sharing or discretionary contribution Plan may stipulate period in which allocation must occur 18

20 Tax and Regulatory Update and Audit Implications of Compliance 403(b) Considerations DOL final regulations removed limited reporting exemption effective 1/1/2009 Subject to ERISA, same reporting requirements as qualified plans Opening balance issues Contracts issued by providers, no longer part of the plan Contracts issued to participants, no longer employed Existence of value records to assess completeness of opening assets DOL Field Assistance Bulletin (Discretion of Implementation by Sponsor) 19

21 Tax and Regulatory Update and Audit Implications of Compliance Unrelated Business Income Tax ( UBIT ) Qualified plans generally not subject to income tax Circumstances may give rise to UBIT in an otherwise tax qualified plan» Alternative investments Limited partnerships, mortgage-backed securities Examine K-1; Line 20 to identify potential UBIT 20

22 Tax and Regulatory Update and Audit Implications of Compliance Schedule C Reporting Compensation received by service providers directly from the plan in connection with services rendered to the plan or a person s position with the plan, (if $5,000 or more) Includes compensation paid by the plan sponsor, if the plan reimburses the sponsor 21

23 Tax and Regulatory Update and Audit Implications of Compliance Schedule C Reporting (cont d) Indirect compensation to include: Fees charged against and reflected in a fund s return Shareholder servicing fees Account maintenance fees 12b-1 distribution fees Float revenue Brokerage commissions Soft dollar compensation Special Rules non-monetary compensation (trips, meals, gifts and awards see page 26 of presentation) 22

24 Tax and Regulatory Update and Audit Implications of Compliance Schedule C Reporting (cont d) Indirect compensation to include: Special Rules non-monetary compensation (trips, meals, gifts and awards)» De minimis may be excluded if value is less than $50 and aggregate is less than $100 for the year (gifts of less than $10 are not required to be counted for in the $100 annual limit) 23

25 Tax and Regulatory Update and Audit Implications of Compliance Late Remittances Employee Deferral Contributions ERISA Section 2 CFR Definition of Plan Assets Participant Contributions In no event shall the date occur later than the 15 th business day of the month following the month in which the participation contribution amounts are received by the employer Not a safe harbor 24

26 Tax and Regulatory Update and Audit Implications of Compliance Late Remittances Employee Deferral Contributions (cont d) DOL view If employer can deposit within 1 business day, that will be the standard used by the DOL If employer can deposit within 5 business days, that will be used as the standard (evaluation of Plan Sponsor s process and consistency throughout the year) Safe Harbor Small plans (less than 100 participants) 7 business days 25

27 Tax and Regulatory Update and Audit Implications of Compliance Late Remittances Employee Deferral Contributions (cont d) DOL view (cont d) No Safe Harbor Large plan (over 100 participants)» Large companies tend to have more sophisticated payroll systems» Should have back-up employees in plan for payroll processes 26

28 Tax and Regulatory Update and Audit Implications of Compliance Late Deposit of 401(k) Deferrals and Participant Loan Repayments Prevention and Correction Sponsor should set a policy and follow it (auditor responsibility compliance to policy) If sponsor is out of compliance to internal policy constitutes a prohibited transaction: Subject to 15% excise tax under IRC Section 4975 report and pay via Form 5330 Or use DOL s Voluntary Fiduciary Correction Program ( VFCP ) 27

29 Tax and Regulatory Update and Audit Implications of Compliance Late Deposit of 401(k) Deferrals and Participant Loan Repayments Prevention and Correction (cont d) If sponsor is out of compliance to internal policy constitutes a prohibited transaction (cont d): Lost earnings (interest) must be funded to the plan and allocated to participant accounts for the time period between the administrative feasible date; the date actually remitted 28

30 Tax and Regulatory Update and Audit Implications of Compliance Defined Benefit Plans New Minimum Funding Rules Impose a single, modified unit credit method of funding in place of methods previously used Eliminate the Funding Standard Account Require funding to a target of 100% of liabilities with shortfalls made up over 7 years Change assumptions, including interest rate and mortality for funding purposes Require an assumption based on the form of benefit payment 29

31 Tax and Regulatory Update and Audit Implications of Compliance Defined Benefit Plans New Minimum Funding Rules (cont d) Change rules for valuing plan assets Provide special funding rules for at risk plans Provide a different set of rules for Multi-employer plans 30

32 General Trends In Benefit Plans 31

33 General Trends In Benefit Plans More sophistication in Defined Contribution Plan design Life cycle / Target date funds becoming a popular investment (set it and forget it) Adding asset classes Diversification Protection again inflation Focus on plan expenses 32

34 General Trends In Benefit Plans Increase in cash balance and money purchase plans Defined benefit plans Maintenance mode Wind-down mode (frozen) 33

35 Questions? 34