Discussion:403(b) Plan Employee Contributions - NonCompliance Disclosure
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| {{ForumReplyPost|UserID=Jerrykern|Date=25 June 2009|Text=I don't know anything else about the safe-harbor rule here. We're about to start our 401(k) audit, so the topic piqued my interest. We had a potential compliance issue last year. I did a considerable amount of web surfing on this one, and discovered that good information is hard to find on this topic.}} | {{ForumReplyPost|UserID=Jerrykern|Date=25 June 2009|Text=I don't know anything else about the safe-harbor rule here. We're about to start our 401(k) audit, so the topic piqued my interest. We had a potential compliance issue last year. I did a considerable amount of web surfing on this one, and discovered that good information is hard to find on this topic.}} | ||
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| + | {{ForumReplyPost|UserID=Mikelim|Date=25 June 2009|Text=Don't I know it...I used my RIA guides, other websites, and it turned out that this forum was the best place to get information. Jerry - thank you for the link to the article; I read the ERISA rules and the DOL rules, but they are not for financial reporting. | ||
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| + | Natalie - I am auditing the financial statements and not the plan. If it were the plan, I would most certainly disclose. | ||
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| + | I am informing the client of the exposure and discussing with management.}} | ||
Revision as of 20:07, 25 June 2009
Discussion Forum Index --> Accounting Questions --> 403(b) Plan Employee Contributions - NonCompliance Disclosure
| 23 June 2009 | |
| I have a client that I am drafting an audit report for; through my procedures, I discovered that they were in violation of DOL regulations regarding the deposit of employee conributions to the Company 403(b) plan. The issue is that, per ERISA, they are supposed to deposit the contributions by the 15th of the following month, or as soon as reasonably practical.
They did not do this; because of cash flow issues, they withheld the contributions, but did not deposit them until after year end. They are technically out of compliance, but they subsequently rectified it after year end. They did not receive any notices about plan violations. I have been searching my disclosure libraries for something that would cover this, but have not found anything on this specific topic. I was just going to disclose that they were out of compliance, but Management had subsequently rectified this. Anybody have a similar situation? | |
| June 24, 2009 | |
| My understanding is that the employee portion of contributions is required to be deposited as soon as the amounts are It sounds like you notified management of this issue. That is the first step. I am not sure it needs to be disclosed in the statements, however. Perhaps someone else can answer that. | |
| June 24, 2009 | |
| It seems to me no disclosure is required unless you think that there is a possibility your client will incur penalties and those penalties will be material with respect to the financial statements. | |
| 24 June 2009 | |
| I was leaning toward disclosure, as it was an issue of non-compliance, so materiality wasn't the main issue.
I was more worried about the possibility of the violation causing the plan to be disqualified by the IRS/DOL. However, given that they rectified it after year end, and they have not received any other notices and I have no cause to believe they will receive any, perhaps no disclosure is necessary. | |
| 24 June 2009 | |
| Those notices can come months or even years later. Just because you didn't get one doesn't mean one isn't coming. Furthermore, the fact that the violation was caused by cash flow issues raises all sorts of red flags that I, as a financial statement reader, would be concerned with. I would disclose, and then note that the funds were subsequently deposited, but wouldn't call it "rectified," because the DOL may have something to say about that. They can be pretty draconian about fixing things. | |
| June 24, 2009 | |
| Jerry, would you then say that generally you would disclose noncompliance issues? | |
| 24 June 2009 | |
| I've had to disclose noncompliance with things like covenants, even when the noncompliance was cured before the end of the reporting period. We've had to say things like "the Company was not in compliance with certain covenants during the quarter ended December 31, 20xx, and as a result, the Company signed an amendment with the lending institution waiving the noncompliance for the period in question." In our case, the noncompliance caused a potential material liability. Even though it was cured before the end of the period, we disclosed it anyway. The potential liabiltiy (not sure it is material) appears to still exist for Michael's client at period end. The cure was a subsequent event.
Not exactly the same thing, but IDK...it kinda feels the same to me. | |
| 24 June 2009 | |
| Hmmm. Thought about this some more. I think, assuming this is material, FAS 5 may be the best course of action. In that case, FAS 5 says "Disclosure is not required of a loss contingency involving an unasserted claim or assessment when there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment unless it is considered probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable."
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| 25 June 2009 | |
| FAS 5 was the only authoritative guidance that I was leaning on, because the closest thing that I have had with this is non-compliance with loan covenants.
If that is the guidance, than at the time of the financial statements, the contingency or liability cannot be considered probable, nor cannot be estimated. Looks like I am going to have to come up with a creative way of wording this. Thank you for all of your help! | |
| June 25, 2009 | |
| Looks like I am going to have to come up with a creative way of wording this. What do you mean? Are you still going to disclose it? | |
| 25 June 2009 | |
| This was an interesting question, so I looked into the ERISA requirements a little further. It appears that the uncured late remittance at 12/31 will have to be reported, if your client files a 5500 (not all 403(b)s do). Since you basically have to tattle on yourself in the filing, I think that would make the claim/assessment probable of being asserted. Since the regs governing penalties are out there for everyone to see, I'd further assume that the penalty amount is calculable with reasonable certainty.
Here's a nice recap of the late remittance issue: http://www.amper.com/publications/participant-deferrals-fiduciaries.asp | |
| June 25, 2009 | |
| First, I had to correct a statement above about the due date of contributions.
Second, I think it's important to note that auditors of these plans are required to disclose the late payments because they constitute prohibited transactions (the use of employee funds by the custodian). Mike, are you auditing the plan? Or the company's financial statements? Third, the employer is required to make the employees "whole," which means they need to pay them earnings, even in times of losses. There are standard procedures for doing this. The article was very good, although it is a few years old. | |
| June 25, 2009 | |
| Jerry, apparently the 7 business day safe-harbor rule is not final. I've seen lots of references to the 15th business day of the month following withholding with a footnote about the 7 days. Even on the DOL website there's a reference to it not being final. [1] This is all of a sudden very important to me, because I just learned that one of my clients paid their employees' deferrals "late" again. Have you seen or read anything else about the final safe-harbor rule? | |
| 25 June 2009 | |
| I don't know anything else about the safe-harbor rule here. We're about to start our 401(k) audit, so the topic piqued my interest. We had a potential compliance issue last year. I did a considerable amount of web surfing on this one, and discovered that good information is hard to find on this topic. | |
| 25 June 2009 | |
| Don't I know it...I used my RIA guides, other websites, and it turned out that this forum was the best place to get information. Jerry - thank you for the link to the article; I read the ERISA rules and the DOL rules, but they are not for financial reporting.
Natalie - I am auditing the financial statements and not the plan. If it were the plan, I would most certainly disclose. I am informing the client of the exposure and discussing with management. | |
