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GASB 97: What's new, what to do, and what you need to know

05.12.21

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans (GASB 97) addresses specific practice issues that have arisen related to retirement plans. The standard can be roughly divided into two parts, each of which focus on a different aspect of governmental retirement plan accounting. 

Part 1: Component units

Over the years, GASB has wrestled with clarifying exactly what entities should be included in a set of stand-alone financial statements. In general, it defined a financial reporting entity as a stand-alone government and all entities for which it is financially accountable, known as component units. One of the many situations where the government is financially accountable for another entity is where the majority of the entity’s board is appointed by the government. 

GASB 97 clarifies that when the entity has no governing board and the government performs the functions that a board would normally perform, the consideration of consolidation should be the same as if the government appointed a voting majority of a hypothetical governing board. This portion of the standard is consistent with previously issued implementation guides. 

What is new is that GASB 97 creates an exception, allowing defined contribution pension plans, defined contribution OPEB plans, and certain Section 457 plans who do not have a board to be excluded from consideration as a component unit. While GASB believes that it would be appropriate to include them like other entities, they listened to stakeholders who voiced their concerns about the costs of presenting defined contribution plans as component units. Their research showed that most stakeholders do not use information related to defined contribution plans presented as component units of governments, although if the government controls the assets, such information is more valued. GASB decided to balance the costs of preparation with the usefulness of the information.  

Additionally, for the purposes of determining component units, the government is not considered to have a financial burden for defined contribution pension plans and defined contribution OPEB plans that are administered through trusts. 

What should you do? 

First, the intended impact is that there will be fewer defined benefit plans presented as component units. If you currently present a defined benefit plan as a component unit, you may be able to save money by excluding them from the government-wide financial statements. 

Second, if you currently report a defined contribution plan that is administered through a trust as a component unit, you should reassess whether that is still considered a component unit. Remember, even if it is not a component unit, GASB Statement No. 84 Fiduciary Activities may still require it to be included in the financials if the primary government controls the assets. 

When does this apply? 

These changes are effective immediately. 

Part 2: Section 457 plans

Back in 1997 when GASB Statement No. 32 was issued, GASB did not believe it likely that plans established under Internal Revenue Code (IRC) section 457 would be pension plans because at that time, most Section 457 plans did not have employer contributions. In the more than twenty years that have passed since then, the IRC and characteristics of some of these plans have changed, forcing GASB to reconsider their classification. With the issuance of GASB 97, the board stated that it believes Section 457 plans could indeed be pensions. Therefore, Section 457 plans which fit the definition of a pension trigger the same reporting requirements of any other pension plan. 

What should you do? 

If your governmental organization has an employee benefit plan under Section 457, you should take the following steps: 

First, determine whether the plan is a “pension plan” or not. Pension plans provide retirement income or other postemployment benefits such as death benefits, life insurance, and disability benefits. Pensions do not include postemployment healthcare benefits and termination benefits. 

Despite the common usage of “pension” to mean only defined benefit plans, the statement is clear that the term “pension plan” includes defined contribution plans as well.

If the plan fits this definition, proceed to the next step. If not, this statement does not impact you. 

Second, if your Section 457 plan meets the definition of a pension plan and either issues its own standalone financial statements or is included in the financial statements of another government, those financial statements should include all financial reporting requirements that are relevant to pension plans. 

Generally, this means that GASB Statement No. 68 Accounting and Financial Reporting for Pensions (GASB 68) and all its related disclosure requirements are applicable, although there are some plans that don’t fall within GASB 68’s scope where GASB Statement No. 73 Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 applies instead. The additional requirements will not look the same for all entities; defined benefit and defined contribution plans have different reporting requirements and their footnote disclosures will differ. 

When does this apply? 

The requirements related to Section 457 plans apply to fiscal years beginning after June 15, 2021. Some stakeholders requested that GASB delay the adoption due to COVID-19, but the GASB believes that the adoption date they set provides sufficient time for adoption. 

What else do you need to know? 

If your retirement plan falls within the scope of this pronouncement, you may have new costs to deal with, including potentially having to consult with an actuary to develop a model to prepare the new disclosures if you have a defined benefit pension. Fortunately, the GASB believes that most of the additional disclosures will relate to defined contribution pensions which have simpler note disclosures. 

If you would like more information or have questions about your specific situation, please contact Nathan Dunlap or Grant Ballantyne. We’re here to help.
 

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Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

Along with COVID-19 related accounting changes that require our constant attention, we need to continue to keep our eyes on the changes that routinely emerge from the Governmental Accounting Standards Board (GASB). Here is a brief overview of what GASB Statement No. 93, Replacement of Interbank Offered Rates, Statement No. 96, Subscription-Based Information Technology Arrangements, and Statement No. 97 Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, may mean to you. If you want more detail, we’ve included links to more analyses and in-depth explanation of what you need to know now.

GASB 93

We have all heard that by the end of 2021, LIBOR will cease to exist in its current form. In March 2020, the GASB provided guidance to address the accounting treatment and financial reporting impacts of the replacement of interbank offered rates (IBORs) with other referenced rates, while maintaining reliable and comparable information. Statement No. 93 specifically addresses previously issued Statement Nos. 53 and 87 to provide updated guidance on how a change to the reference rate impacts the accounting for hedging transactions and lease arrangements.  Read more in our article The Clock is Ticking on LIBOR. Now What?

GASB 96

GASB Statement No. 96 defines the term Subscription-Based Information Technology Agreements (SBITA) as “A contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.”

GASB Statement No. 96 determines when a subscription should be recognized as a right-to-use subscription, and also determines the corresponding liability, capitalization criteria, and required disclosures. Learn why this matters and what you need to do next: Our Take on SBITA: Making Accounting for Cloud-Based Software Less Nebulous.

GASB 97

GASB Statement 97 addresses specific practice issues that have arisen related to retirement plans. The standard is roughly divided into two parts—component units and Section 457 plans—each of which focus on a different aspect of governmental retirement plan accounting. Help your organization gain an understanding of the standard with our article GASB 97: What's new, what to do, and what you need to know.

If you have questions about these pronouncements and what they mean to your organization, please contact Grant Ballantyne.

Article
Update for GASB-governed organizations: Lease accounting, LIBOR transition, SBITA, and Section 457 plans

Read this if you are responsible for meeting your broker-dealer’s annual report filing requirement under Securities Exchange Act (SEA) Section 15.

In February, the US Securities and Exchange Commission (SEC) approved a 30-day extension for eligible broker-dealers to file their annual reports, effective immediately. Firms that meet the criteria should consider taking advantage of the filing extension. Here are a few details and tips to help broker-dealers understand more about the 30‑day extension.

SEA Section 15 filing extension background

Normally, each broker-dealer registered under Securities Exchange Act (SEA) Section 15 must file annual reports—including financial and compliance or exemption reports, along with those prepared by an independent accountant—no more than 60 days after the broker-dealer’s fiscal year ends. But in light of disruption caused by the COVID-19 pandemic, the Financial Industry Regulatory Authority (FINRA) requested that the SEC allow broker-dealers an extra 30 days to file their annual reports. The extension, FINRA argued, would allow broker-dealers more time to obtain audit services.

Criteria for broker-dealers eligible for the extension

To qualify for a filing extension of 30 calendar days, a broker-dealer must meet the following criteria:

  1. Was in compliance with 15c3-1 (Net Capital) as of its most recent fiscal year end and had total capital and allowable subordinated liabilities of less than $50 million,
  2. Is permitted to file an exemption report as part of its most recent fiscal year-end annual reports,
  3. Submits written notification to FINRA and the Securities Investor Protection Corporation (SIPC) of its intent to rely on this order on an ongoing basis for as long as it meets the conditions of the order, and
  4. Files the annual report electronically with the SEC using an appropriate process.

The extension does not apply to just this year alone. It is understood to be in effect on an ongoing basis.

How to notify FINRA of your intent to take advantage of the extension

Broker-dealers that meet the aforementioned conditions are required to notify FINRA of their intent to take advantage of the extension. FINRA advises eligible broker-dealers to send an email to their Risk Monitoring Analyst with a message structured according to the following template:

“My firm wishes to have an additional 30 calendar days for filing its annual report on an ongoing basis for as long as my firm meets the conditions set forth in the SEC Order of February 12, 2021, regarding additional time for filing annual reports under SEA Rule 17a-5.”

How to file electronically

In addition to notifying FINRA, those looking to benefit from the extension are required to file electronically. There are multiple ways to do so, but the most user-friendly and efficient avenue to electronic filing is through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

Using the EDGAR system, broker-dealers must upload only two attachments maximum. The EDGAR system offers two options for electronic filing:

  1. The broker-dealer could attach one document containing all the annual reports as a public document; or
  2. The broker-dealer could attach two documents to its submission: (1) a public document containing the statement of financial condition, the notes to the statement of financial condition and the accountant’s report which covers the statement of financial condition, and (2) a non-public document containing all the components of the annual reports.

Implications for annual filings

An upcoming filing deadline is a stressful event, especially for broker-dealers contending with the upheaval of the past 18 months. Fortunately, FINRA has advocated on their behalf, and the SEC has complied by offering a 30-day filing extension.

The extension provides broker-dealers excess time to review documents and schedule a session with their auditor. Auditors will likely appreciate the extension as well, as it allows them to serve their various clients over a longer period of time, alleviating some of the pressure traditionally associated with filing season.

For these reasons and more, broker-dealers who qualify are encouraged to take the steps required to benefit from this grace period. If you have questions or would like more information, please contact our broker-dealer consulting team. We're here to help.

Article
Eligible broker-dealers: Take advantage of SEC's 30-day filing extension

Read this if you are a plan sponsor of employee benefit plans.

This article is the ninth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here

Employee benefit plan loan basics 

If your plan’s adoption agreement is set up to allow loans, participants can borrow against their account balance. Some participants may find this an attractive option as the interest they pay on the loan is returned to their retirement account as opposed to other loans where the interest is paid to the lender. 

Additionally, while interest is charged at the market rate, it may be lower than other options available to the participant, such as a credit card or other unsecured debt. Unlike hardship distributions, there are no restrictions on the circumstances under which a participant may take a loan. A potential downside is that if the borrower defaults on the loan or ends their employment and cannot repay the loan in full, it converts from a loan to a deemed distribution, potentially incurring taxes and penalties.

If a participant decides that an employee benefit plan loan is their best option, they will apply for the loan through your plan administrator. Loans are limited in both size and quantity. Participants may take loans up to 50% of their vested account balance with a maximum loan of $50,000. The provisions of a plan determine how many loans an employee may have at once; however, the combined loan balances cannot exceed 50% of the employee’s vested balance or $50,000. Furthermore, the $50,000 loan maximum must also consider payments made on loans within the previous 12 months.

Repayment of employee benefit plan loans

Repayment of employee benefit plan loans may be done through after tax payroll contributions, making it a relatively easy process for the participant. If a plan sponsor elects to provide this repayment option, they must ensure that repayments are remitted to the plan in a timely manner, just as they must with other employee funded contributions. The term of the loan is typically limited to five years and must be repaid in at least quarterly installments. However, a loan can be extended to as long as thirty years if specified within the plan’s loan policy. If the loan term is for longer than five years, the loan proceeds must be used to purchase a primary residence.

Like any source of debt, there are pros and cons to taking out an employee benefit plan loan, and it remains an important option for participants to understand. The benefits include the ease of applying for such a loan and loan interest that is then added to the participant’s retirement account balance. Potential pitfalls include lost earnings during the loan period and the risk of the loan becoming a deemed distribution if the participant is unable to repay within the allotted time. 

If you would like more information, or have specific questions about your specific situation, please contact our Employee Benefits Audit team.

Article
Retirement plan loans: A brief review

Read this if you have a blended workforce with both in-office employees and remote workers.

It is hard to believe it has been nearly a year and a half since we started our remote work journey. At the time, many thought the move to working remotely would be short term. Then, a couple of weeks turned into a month, a month into another month, another month into a year and, some employers are now finally considering re-opening their offices.

Back in April 2020, we provided some internal control challenges, and potential solutions, faced by working in a remote environment. These challenges included exercising appropriate tone at the top, maintaining appropriate segregation of duties, and ensuring timely review, amongst others. Although these challenges still exist, there are new considerations to address as we transition into (hopefully) a post-pandemic world.

Blended workforces

As we mentioned in that article, since people have now been forced to work in a remote environment, they will be more apt to continue to do so. For some employees, the perks of ditching that long commute outweighs the free coffee they receive in the office. Employers have a decision to make—do we allow our employees the option to continue to work from home or, do we require employees to work from the office, as was standard pre-pandemic? Now that employees have exhibited the ability to work from home efficiently and effectively, it may be difficult to move all employees back into the office. Requiring all employees to return to the office could result in employees seeking employment elsewhere, and the option to work remotely is a selling point for many recruiters. Furthermore, disallowing remote work could cause employees to feel distrusted or undervalued, possibly leading to less efficient and effective work.

However, remote work comes with many challenges. Although video chat has been instrumental in navigating the remote work environment, it still has limitations. Nothing can beat in-person conversations and the relationships they help build. Nearly every video chat has a purpose, and unfortunately, you can’t just “run” into somebody in a video chat as you can in the office. Building camaraderie and instilling your company’s culture is difficult in a remote environment. And, if your workforce is blended, with some working in the office while others work remotely, building culture may be even more difficult than if your entire workforce was remote. Employees in the office may be less apt to communicate with remote colleagues. If you have a task you wish to delegate, you may think of giving the assignment to someone in the office prior to thinking of your remote co-workers that may be just as able and willing to complete the assignment. It will be important to ensure all employees are provided with equal opportunities, no matter of where they work.

Remote work policy

Regardless of your company’s decision to allow employees to work remotely or not, we recommend developing a remote work policy addressing expected behaviors. When developing such a policy, consider:

  •  Will the policy’s provisions apply to the entire company or will there be different provisions by department? If the latter, consider what the implications may be on employee morale.
  • Will there be a minimum amount of days per week that must be spent in the office?
  • If employees are allowed to work remotely, do they need to work a set schedule or can the frequency, and which days they work remotely, change from week to week?
  • Who should the employee communicate their decision to? How will this information then be shared company-wide?
  • How do remote employees address document destruction? If they are handling sensitive and confidential documents, how should they dispose of these documents?
  • Similarly, what are the expectations for protecting sensitive and confidential information at home?
  • Are employees allowed to hook up company-provided equipment to personal devices, such as personal printers?
  • If an employee is customer/client facing, what are the expectations for dress code and backgrounds for video chat meetings?
  • What will staff development look like for individuals working remotely? Alternatively, what will their involvement look like in onboarding/developing new employees?
  • What are the expectations for meetings? Will all meetings be set up in a manner that accommodates in-person and remote attendees? Are there meetings where in-person attendance is mandatory?

The importance of these considerations will likely differ from company to company. Some of these considerations may be addressed in other, already existing policies.

Are your internal controls “blended workforce” ready?

If your company plans to allow employees to work remotely, you will need to assess if your internal controls make sense for both in-office and remote employees. Typically, internal controls are written in a manner irrespective of where the employee resides. However, there may be situations that require an internal control be re-worked to accommodate in-office and remote employees. For instance, do you have an internal control that references a specific report that can only be run in-office? If the control owner plans to transition to a hybrid work schedule, does the frequency of the internal control need to change to reflect the employee’s new schedule? Alternatively, does it make sense to transition this internal control to someone else that will be in the office more frequently?

Internal control accommodations

The transition to a remote environment was expeditious and many thought the remote environment would be over quickly. As a result, there may have been modifications to internal controls that were made out of necessity, although they were not ideal from an internal control standpoint. The rationale for these accommodations may have been the expectation that the remote environment would be short-lived. Although these accommodations may have made sense for a short amount of time, and posed little to no additional risk to your company, the longer these accommodations remained in effect, the greater the chance for unintended consequences. 

We recommend reviewing your internal controls and creating a log of any internal control accommodations that were made due to the pandemic. Some of these modifications may continue to make sense and, after operating under the new internal control for an extended period of time, may even be preferable to the previous internal control. However, for those modifications that do appear to have increased control risk, control owners should assess if the length of the pandemic could have resulted in inadequately designed internal controls. And, if so, what could the consequences of these poorly designed internal controls have been to the company?

Internal control vs. process

While reviewing your company’s internal controls, it will also be a good time to ensure your internal control descriptions actually describe an internal control rather than simply a process. Although having well-documented processes for your company’s various transaction cycles is important, a good internal control description should already incorporate the process within it. Think of your internal control descriptions as writing a story—the “process” provides background information on the characters and setting, while the “internal control” is the story’s plot.

For example: The Accounting Manager downloads the market values from the investment portfolio accounting system and enters the market values into the general ledger on a monthly basis. Once the journal entry is entered, the Accounting Manager provides the market value report and a copy of the journal entry to the Controller.

Although a savvy reader may be able to identify where the internal control points are within this process, it could easily be modified to explicitly include discussion of the actual internal controls. The text in bold below represents modifications to the original:

The Accounting Manager downloads the market values from the investment portfolio accounting system and enters the market values into the general ledger on a monthly basis. Once the journal entry is entered, the Accounting Manager provides the market value report and a copy of the journal entry to the Controller via email. This email serves as documentation of preparation of the journal entry by the Accounting Manager. The Controller then reviews the market value report against the journal entry for accuracy. Once approved, the Controller posts the journal entry and replies to the email to indicate their review and approval. The Accounting Manager saves the email chain as auditable evidence.

The text additions in bold font help provide a complete story. A new employee could easily read this description and understand what they need to do, and how to appropriately document it. Most importantly, the internal control is both in-office and remote environment friendly.

Transitioning back to the office has resulted in a mixture of excitement and anxiety. Routine office norms, such as shaking hands and having a spontaneous meeting over a cup of coffee need to be relearned. Likewise, policies and internal controls need to be revisited to address the changing landscape. The more proactive your company can be, the better positioned it will be to accommodate its employees’ demands, while also maximizing the effectiveness of its internal controls. Please contact David Stone or Dan Vogt if any questions arise.

Article
May the "blended workforce be with you": Policy and internal control considerations for a new era

Read this if you are a plan sponsor of employee benefit plans.

This article is the eighth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here

The Department of Labor regulations regarding service provider fee disclosures clarify that plan fiduciaries are responsible for assessing the reasonableness of fees charged to plans in relation to services performed. 

Before a plan fiduciary is able to assess the reasonableness of plan fees, the fiduciary has to receive required fee disclosures from their covered service provider. A covered service provider is considered a party that enters into an agreement with a covered plan to provide certain services. The range of services provided generally include recordkeeping services, investment adviser services, accounting services, auditing services, actuarial services, appraisals, banking, consulting, legal services, third party administration services, or valuation services provided to the plan.

In general, the covered service providers are required to provide the plan fiduciary a disclosure of the following information:

  • All expected services and fees, and
  • All direct and indirect compensation
    • Direct compensation are fees paid to the service providers from the plan
    • Indirect compensation are fees paid to the service providers from sources other than the plan, the plan sponsor, the covered service provider, or an affiliate 

Once the service provider fee disclosures are received, the responsible plan fiduciary must assess the reasonableness of the fees in relation to the services provided. There are numerous ways a plan fiduciary can determine if the fees are reasonable. The following are some of the most common ways to determine if the plan expenses are reasonable:

  • Complete a Request for Proposal (RFP) or Request for Information (RFI) process that compares at least two vendors.
  • Complete a plan “benchmarking” project. The responsible plan fiduciary can have an independent organization compare the fees charged to the plan to plans of similar size and characteristics. Failure to determine the reasonableness of the fees charged can result in a prohibited transaction. The responsible plan fiduciary should determine and document whether the fees are reasonable. Documentation should also include the steps taken to make this determination.

It is important to remember that failure to assess the reasonableness of the service provider fees can result in a prohibited transaction. Documentation of the assessment process, including steps taken to make a determination on fee reasonableness, is the best way to avoid having a prohibited transaction.

If you have any questions while assessing your service providers’ fees, please contact our Employee Benefits Audit team.
 

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Service provider fee disclosures: Understanding the process

Read this if you are an organization that received federal funding subject to the Uniform Guidance. 

We are excited to announce the OMB released the 2021 Compliance Supplement late last week. This long-awaited release is effective for audits of fiscal years beginning after June 30, 2020 and supersedes the 2020 supplement and subsequent addendum. We are continuing to evaluate the changes to the supplement, but a few things to note from our early look:

  • There will be an addendum to this supplement, to address certain COVID-related relief funding with changing regulations that were not in place in time for this supplement. 
  • Good news for higher education: Part 4 of the supplement related to the Higher Education Emergency Relief Funds (within assistance listing 84.425, section 2) is not expected to be amended by the addendum.
  • The supplement is making the formal shift away from the “Catalog of Federal Domestic Assistance” (or CFDA) language to the term “Assistance Listing” in describing the number used for each program.
  • To evaluate the changes in the supplement from the prior year, consider checking out the Matrix of Compliance Requirements in Part 2 and Appendix V.

The timing for the release of the anticipated addendum has not yet been confirmed, but your audit teams are excited to get started with the new supplement. If you have any questions or need help making sense of it all, contact our Single Audit team. We’re here to help.

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OMB 2021 compliance supplement released

Read this if you are a timber harvester, hauler, or timberland owner.

The USDA recently announced its Pandemic Assistance for Timber Harvesters and Haulers (PATHH) initiative to provide financial assistance to timber harvesting and hauling businesses as a result of the pandemic. Businesses may be eligible for up to $125,000 in financial assistance through this initiative. 

Who qualifies for the assistance?

To qualify for assistance under PATHH, the business must have experienced a loss of at least 10% of gross revenue from January, 1, 2020 through December 1, 2020 as compared to the same period in 2019. Also, individuals or legal entities must be a timber harvesting or timber hauling businesses where 50% or more of its revenue is derived from one of the following:

  • Cutting timber
  • Transporting timber
  • Processing wood on-site on the forest land

What is the timeline for applying for the assistance?

Timber harvesting or timber hauling businesses can apply for financial assistance through the USDA from July 22, 2021 through October 15, 2021

Visit the USDA website for more information on the program, requirements, and how to apply.
If you have any questions about your specific situation, please contact our Natural Resources team. We’re here to help. 

Article
Temporary USDA assistance program for timber harvesters and haulers

Read this if you are a plan sponsor of employee benefit plans.

This article is the seventh in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

The COVID-19 pandemic has challenged individuals and organizations to continue operating during a time where face-to-face interaction may not be plausible, and access to organizational resources may be restricted. However, life has not stopped, and participants in your employee benefit plan may continue to make important decisions based on their financial needs. 

To help you prepare for a potential IRS examination, we’ve listed some requirements for participants to receive Required Minimum Distributions (RMD), hardship distributions, and coronavirus-related distributions, recommendations of actions you can perform, and documentation to retain as added internal controls. 

Required Minimum Distributions

Recently, the IRS issued a memo regarding missing participants, beneficiaries, and RMDs for 403(b) plans. If an employee benefit plan is subject to the RMD rules of Code Section 401(a)(9), then distributions of a participant’s accrued benefits must commence April 1 of the calendar year following the later of 1) the participant attaining age 70½ or 2) the participant’s severance from employment. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, RMDs was temporarily waived for retirement plans for 2020. This change applied to defined contribution plans, such as 401(k), 403(b), 457(b) plans and IRAs. 

In addition, RMDs were waived for IRA owners who turned 70½ in 2019 and were required to take an RMD by April 1, 2020 and have not yet done so. Do note the waiver will not alter a participant’s required beginning date for purposes of applying the minimum distribution rules in future periods. Although you may be applying this waiver during 2020, it is important you prepare to make RMDs once the waiver period ends by verifying participants eligible to receive RMDs are not “missing.”

There are instances in which plans have been unable to make distributions to a terminated participant due to an inability to locate the participant. In this situation, the responsible plan fiduciary should take the following actions in applying the RMD rules:

  1. Search the plan and any related plan, sponsor and publicly available records and/or directories for alternative contact information;
  2. Use any of the following search methods to locate the participant: a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating individuals; and
  3. Attempt to initiate contact via certified mail sent to the participant’s last known mailing address, and/or through any other appropriate means for any known address(es) or contact information, including email addresses and telephone numbers.

If the plan is selected for audit by the IRS and the above actions have been taken and documented by the plan, the IRS instructs employee plan examiners not to challenge the plan for violation of the RMD rules. If the plan is unable to demonstrate that the above actions have been taken, the employee plan examiners may challenge the plan for violation of the RMD rules.

We typically recommend management review plan records to determine which participants have attained age 70½. Based on the guidelines outlined above, we recommend plans document the actions they have taken to contact these participants and/or their beneficiaries.

Hardship distribution rules

A common issue we identify during our employee benefit plan audits is that the rules for hardship distributions are not always followed by the plan sponsor. If the plan allows hardship withdrawals, they should only be provided if (1) the withdrawal is due to an immediate and heavy financial need, (2) the withdrawal must be necessary to satisfy the need (you have no other funds or ways to meet the need), and (3) the withdrawal must not exceed the amount needed. You may have noted we did not add the plan participant must have first obtained all distribution or nontaxable loans available under the plan to the list of requirements above. This is due to the recently enacted Bipartisan Budget Act of 2018 (the Act), which removed the requirement to obtain available plan loans prior to requesting a hardship. Thus, the removal of this requirement may increase the number of eligible participants to receive hardship withdrawals, if the three requirements noted are satisfied. The plan sponsor should maintain documentation the requirements for the hardship withdrawal have been met before issuing the hardship withdrawal.

The IRS considers the following as acceptable reasons for a hardship withdrawal:

  1. Un-reimbursed medical expenses for the employee, the employee’s spouse, dependents or beneficiary.
  2. Purchase of an employee's principal residence.
  3. Payment of college tuition and related educational costs such as room and board for the next 12 months for the employee, the employee’s spouse, dependents, beneficiary, or children who are no longer dependents.
  4. Payments necessary to prevent eviction of the employee from his/her home, or foreclosure on the mortgage of the principal residence.
  5. For funeral expenses for the employee, the employee’s spouse, children, dependents or beneficiary.
  6. Certain expenses for the repair of damage to the employee's principal residence.
  7. Expenses and losses incurred by the employee as a result of a disaster declared by the Federal Emergency Management Agency (FEMA), provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.

Prior to the enactment of the Act, once a hardship withdrawal was taken, the plan participant would not be allowed to contribute to the plan for six months following the withdrawal. The Act repealed the six-month suspension of elective deferrals, thus plan participants are allowed to continue making contributions to the plan in the pay period following the hardship withdrawal. Prior to the Act we had seen instances where the plan participant was allowed to continue making contributions after the hardship withdrawal was taken. Now we would expect participants who received a hardship distribution to continue making elective deferrals following receipt of the distribution.

Coronavirus-related distributions

Under section 2202 of the CARES Act, qualified participants who are diagnosed with coronavirus, whose spouse or dependent is diagnosed with coronavirus, or who experience adverse financial consequences due to certain virus-related events including quarantine, furlough, or layoff, having hours reduced, or losing child care, are eligible to receive a coronavirus-related distribution. 

Distributions are considered coronavirus-related distributions if the participant or his/her spouse or dependent has experienced adverse effects noted above due to the coronavirus, the distributions do not exceed $100,000 in the aggregate, and the distributions were taken on or after January 1, 2020 and on or before December 30, 2020.  Such distributions are not subject to the 10% penalty tax under Internal Revenue Code (IRC) § 72(t), and participants have the option of including their distributions in income ratably over a three year period, or the entire amount, starting in the year the distribution was received. Such distributions are exempt from the IRC § 402(f) notice requirement, which explains rollover rules, as well as the effects of rolling a distribution to a qualifying IRA and the effects of not rolling it over. Also, participants can be exempt from owing federal taxes by repaying the coronavirus-related distribution. 

Participants receiving this distribution have a three-year window, starting on the distribution date, to contribute up to the full amount of the distribution to an eligible retirement plan as if the contribution were a timely rollover of an eligible rollover distribution. So, if a participant were to include the distribution amount ratably over the three-year period (2020 – 2022), and the full amount of the distribution was repaid to an eligible retirement plan in 2022, the participant may file amended federal income tax returns for 2020 and 2021 to claim a refund for taxes paid on the income included from the distributions, and the participant will not be required to include any amount in income in 2022. We recommend the plan sponsor maintain documentation supporting the participant was eligible to receive the coronavirus-related distribution. 

There is much uncertainty due to the current status of the COVID-19 pandemic, and this has forced many of our clients to review and alter their control environments to maintain effective operations. With this uncertainty comes changes to guidance and treatment of plan transactions. We have provided our current understanding of the guidance the IRS has provided for the treatment surrounding distributions, specifically RMDs, hardship distributions, and coronavirus-related distributions. If you and your team have any additional questions which may be specific to your organization or plan, an expert from our Employee Benefits Audit team will be gladly willing to assist you. 
 

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