Josie Hammond - Auditing Employee Benefit Plans

Form 5500 defines kinds of filers as different types of plan entities.

A single employer plan is a plan maintained by one employer or one employee organization. A plan of a controlled group of corporations or common control employers is considered a single employer plan for ERISA purposes. This exists when one plan is maintained for a controlled group of corporations, a group of trades or businesses under common control, or an affiliated service group. If a member of any of these groups maintains a plan that does not involve other group members, then a separate Form 5500 is filed as a single employer plan.

A plan is a multiemployer plan if

more than one employer is required to contribute;

the plan is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer; and

an election under IRC Section 414(f)(5) and ERISA Section 3(37)(E) has not been made or has been revoked as permitted by the Pension Protection Act of 2006. The plan sponsor of a multiemployer plan, with whom ultimate administrative responsibility rests, is a joint employer or union board of trustees.

Participating employers do not file individually for these plans.

Multiemployer plans are unique in that assets contributed by one employer may be used to pay benefits of another participating employer. If a participating employer fails to make its required contributions, the unfunded obligation may be borne by the remaining participating employers. In addition, an employer that stops participating in the plan is generally required to pay a withdrawal liability.

Multiple employer plans are plans that are maintained by more than one employer but not treated as a multiemployer plan. Multiple employer plans are generally not collectively bargained and are intended to allow participating employers to pool their assets for investment purposes and to reduce the costs of plan administration. A multiple employer plan maintains separate accounts for each employer so that contributions provide benefits only for employees of that contributing employer.

If a multiple employer plan (other) provides welfare benefits, it is sometimes characterized as a multiple-employer-welfare-arrangement (MEWA). A single Form 5500 can be filed by the MEWA for all the plans in the arrangement.

Multiemployer and multiple employer plans are subject to different accounting requirements that are outside the scope of this course. The AICPA’s Audit & Accounting Guide Employee Benefit Plans provides specific guidance.

There were new developments with respect to multiple employer plans during 2012 12. The elements of this change are too detailed for a basic course. The auditor, however, should be warned that multiple employer plans which filed a single Form 5500 in prior years may be required to file multiple reports for each participating employer under this revised interpretation.

Though employee benefit plans are generally exempt from Federal income tax, they can still be exposed to income tax in certain situations. This tax is reported on Form 990-T. If the income is significant, the plan must also file quarterly tax payments.

If the plan invests in a pass-through entity – a partnership or S corporation – and that entity is engaged in a trade or business (as opposed to simply investment activity), then the plan will report unrelated business income on its share of any pass-through income. ESOPs are exempt from that tax to the extent that the pass-through income is associated with “qualifying employer securities” as defined in IRC Section 409(l) .

Another common source of unrelated business income arises when a plan incurs debt to acquire an investment. For example, if securities are acquired by a plan on margin, unrelated business income tax may apply. There are exemptions from this rule relating to certain debt-financed real estate rental investments and leveraged ESOPs. This rule becomes complicated when the plan invests in a pass-through entity. That entity may generate investment income, but if it uses debt financing to generate that income, the plan could be subject to unrelated business income tax.

Audit procedures could include inquiring of plan trustees regarding their controls over the determination of unrelated business income, receipt of any income tax reports – Schedules K-1 for pass-through entity investments or other steps to manage this area. A properly completed Schedule K-1 should acknowledge the existence of unrelated business income by including the amount in Box 20 and designating it with a Code V. The plan, as a partner, is required to notify the entity of its tax-exempt status. Thus, the absence of the Code V designation may not be determinative if the plan never notified the entity that it was tax-exempt or if the preparer is unfamiliar with the importance of the coding.

Finally, welfare benefit plans may be subject to a special form of unrelated business income tax, which is incurred only if the plan’s assets exceed certain funding limits. These rules are found in IRC Sections 419 and 419A.

In the event a benefit plan has significant exposure to this tax, the auditor will also need to assess the effect of any uncertain tax positions under FASB ASC 740, Income Taxes . As described earlier in this chapter, the plan’s tax-exempt status is also a tax position that must be considered under this standard. Other tax positions would relate to the status of income as subject to unrelated business income tax and where the income is subject to unrelated business income tax, the determination of the amount and timing of items of income or expense. This is not merely a Federal tax consideration. Many states also impose this tax.

The benefit and plan structure intended by the plan sponsor must be practiced in form. If more than one type of benefit is offered under the same plan, then the plan should be written accordingly. If benefits are to be offered under separate plans, it should be remembered that the reporting and filing requirements apply to each plan. Benefits do not stand-alone. They must be contained within a plan. The audit requirement, like the Form 5500 filing, is based on plan definition, with some exceptions, covered in the following exhibit under plan entities. Generally, only one plan at a time, pension or welfare, can be covered by a Form 5500. Proper reporting requires a complete understanding of the plan and benefit structure.

The following 3 exhibits outline unique audit considerations by plan type, tax considerations in an employee benefit plan audit and provide a quick reference chart for Form 5500.