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Company Reimbursements—Employee Pay or Not?

“Are reimbursements that an employee receives from his or her employer for business expenses counted as income on Form W-2?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to what items constitute wages for plan purposes.

Highlights of the Discussion

Generally, reimbursements that an employee receives from his or her employer for business expenses count as pay or income on Form W-2 (box 1) only if the reimbursements are treated as paid under a “nonaccountable plan” as opposed to an “accountable plan” [See IRS Publication 15 (Circular E)] and Publication 463, Travel, Gift and Car Expenses]. Conversely, reimbursements paid from an accountable plan are not treated as employee pay or income, and are not reported on Form W-2. An employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan.

Accountable Plan

To be an accountable plan, an employer’s reimbursement or allowance arrangement must satisfy all of the following rules.

  1. Employee expenses must have a business connection; meaning, an employee must have paid or incurred deductible expenses while performing services as an employee of the employer;
  2. An employee must adequately account to his or her employer for these expenses within a reasonable period of time; and
  3. An employee must return any excess reimbursement or allowance within a reasonable period of time.

Nonaccountable Plan

A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three criteria listed above. Be aware, however, that even if an employer has an accountable plan (as described above), the IRS will treat the following payments as being paid under a nonaccountable plan:

  • Excess reimbursements an employee fails to return to the employer, or
  • Reimbursement of nondeductible expenses related to the employer’s business.

An employer will combine the amount of any reimbursement or other expense allowance paid under a nonaccountable plan with an employees wages, salary, or other income, and report the total in box 1 of Form W-2.

Conclusion

Whether reimbursements to an employee for business expenses count as pay or income for the recipient depends on whether the employer pays such amounts from an accountable or a nonaccountable plan.

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DOL Filing for Top Hat Plans

“Are top hat plans required to file a Form 5500 report with the Department of Labor (DOL)?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related to top hat plans.

Highlights of the Discussion

Top hat plans (i.e., unfunded plans maintained for a select group of management or highly compensated employees) are exempt from most of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), including the need to file a Form 5500 series report. Instead, top hat plans are subject to an alternative method of compliance with the reporting and disclosure provisions of ERISA.

Sponsors of top hat plans are required to submit a “statement” to the DOL pursuant to DOL Reg. 2520.104–23 within 120 days of the plan’s effective date. As of August 16, 2019, it is mandatory for sponsors of such plans to file top hat plan statements electronically via the Top Hat Plan Statements Online Filing System. In March 2020, the DOL introduced its a top-hat plan statement search engine.

The information requested on the statement is quite simple:

  • Employer identification information (EIN, name, address);
  • Plan administrator information;
  • Number of top-hat plans maintained;
  • Number of participants in each plan; and
  • A declaration that the sponsor maintains the plan(s) primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

If a sponsor fails to file the top hat statement with the DOL, the plan could be subject to ERISA’s full reporting and disclosure requirements, and assessed penalties by the DOL and IRS. Corrections can be made through the Delinquent Filer Voluntary Compliance Program.

Conclusion

While a sponsor of a top hat plan does not have to file an annual Form 5500 series report for the plan, it must submit a statement to the DOL within 120 days of the plan’s effective date. Failure to do so could result in more burdensome reporting requirements and penalties.

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Auditor’s Report “Disclaimer of Opinion” for Form 5500 Filings

“What does it mean when the auditor’s report for a plan’s Form 5500 filing says the auditor, ‘does not express an opinion?’ I thought that was the whole purpose of the auditor’s report.”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to the report performed by an independent qualified public accountant (the auditor)[1] that accompanies certain Form 5500 filings

Highlights of the Discussion

Most likely, the plan in question was subject to a “limited-scope” audit rather than a “full-scope” audit of the plan’s financial information. Under a limited scope audit, the auditor can only render a “Disclaimer of Opinion,” because he or she was not able to obtain sufficient audit evidence to provide a basis for an audit opinion.

Under ERISA Sec. 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Limited Scope Audit VS. Full Scope Audit

Limited Scope

Full Scope

The auditor does not audit the certified investment Information for the plan. He or she still tests participant data, including the allocation of investment income to individual participant accounts, and tests contributions, benefit payments and other information that was not certified. The auditor reviews the entity’s financial statements, including all assets; liabilities and obligations; and financial activities, without any limitation.

It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an auditor’s examination have been satisfied, and only the plan sponsor can request the auditor to limit the scope of the audit. The American Society of Certified Public Accountants (AICPA) has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

As an interesting aside, the Department of Labor (DOL) attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[2] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

To date there have been no law changes, but the AICPA Auditing Standards Board, in 2019, issued two new auditing standards related to the financial statements and annual reports of employee benefit plans, and transparency in annual reports:

  1. Statement on Auditing Standards(SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA; and
  2. Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports.

SAS 136 creates a new section in the AICPA Professional Standards, and deals with the auditor’s responsibility to form an opinion and report on the audit of financial statements of ERISA employee benefit plans. SAS 136 takes effect for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. SAS 137 enhances transparency in reporting related to the auditor’s responsibilities for nonfinancial statement information included in annual reports.

SAS 136 will affect limited-scope audits when it takes effect by

  1. Referring to such audits as ERISA Sec.103(a)(3)(C) audits;
  2. Clarifying what is expected of the auditor, including specific, new procedures that apply when performing the audit; and
  3. Establishing a new form of report that provides greater transparency about the scope and nature of the audit, and describes the procedures performed on the certified investment information.

For a summary of the SAS 136 changes to Form 5500 reporting, please refer to AICPA’s At A Glance: New Auditing Standard for Employee Benefit Plans.

Conclusion

Limited scope audits of Form 5500 filings may only receive a Disclaimer of Opinion from the independent auditor. Note that for audits of plan information for periods ending on or after December 15, 2020, limited scope audits will change under new SAS 136 and SAS 137.

[1] Although there are exceptions, generally, Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series).

[2] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

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In-Service Distributions from Gov’t. 457(b) Plans

“Can a governmental 457(b) plan permit participants to take plan withdrawals while they are still working?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from North Carolina is representative of a common inquiry related to in-service distributions from retirement plans.

Highlights of the Discussion

Yes, as a result of a law change effective in 2020, governmental 457(b) plans now have the ability to offer in-service distributions to participants starting at age 59 ½, if the sponsor has chosen to implement the provision.

Allowing age-59 ½ distributions was a significant change brought about by the Setting Every Community Up for Retirement Enhancement (SECURE) Act for plan years beginning after December 31, 2019. [See Division M: Bipartisan American Miners Act (Section 104) of the Further Consolidated Appropriations Act, 2020) for authorizing language.]

In the past, 457(b) plan participants could only access their plan assets upon

  • Reaching the age for required minimum distributions,
  • Severing employment,
  • Experiencing an unforeseeable emergency,
  • Qualifying for a one-time cash-out (i.e., the account balance was $5,000 or less, and there had been no employee contributions for at least two years),
  • Termination of the plan, or
  • Divorce, pursuant to a qualified domestic relations order.

Governmental 457(b) plan sponsors who offer these early withdrawals can implement them immediately, and amend their plan documents to authorize them later. Formal amendments to incorporate age-59 ½, in-service distributions are due by the end of the 2024 plan year.

A governmental 457(b) plan distribution would be taxable to the recipient, generally, unless the individual rolled it over to another eligible plan or IRA.

Conclusion

The list of distributable events for governmental 457(b) plans now includes in-service distributions at age 59 ½ for sponsors that choose to offer them.

 

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