Employee Benefit Plan Audit Quality Center

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Employee Benefit Plan Audit Quality Center

• Roundtable Discussion
• Pension Protection Act
• Audit Considerations
• November 20, 2007
•  

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Moderator

• Rebecca Miller, CPA Partner
• McGladrey Pullen, LLP

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Panelists

• Anita Baker, Partner, Larson, Allen, Weishair
  Co.
• Sherry Davis, Partner, PricewaterhouseCoopers LLP
• Marilee Lau, Partner, KPMG LLP
• James Merklin, Partner, Bober, Markey, Fedorovich
  Co.

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Roundtable Objectives

• Provide a brief overview of the 2007 developments
  under the PPA
• Discuss other emerging issues
• Roth 401(k)s
• Recent tax regulation issues
• Committee member discussion of the implications
  of these developments on plan audits

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PPA and Other Regulatory Developments

• Automatic 401(k) enrollments
• Qualified default investment alternatives
• Other investment issues
• Other defined contribution pension plan changes
• Defined benefit pension plans
• Other changes
• New participant statements
• Bonding changes
• Document compliance
• New regulations

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Pension Protection Act

• Legislation signed August 17, 2006
• Revised many retirement plan provisions
• Defined benefit plan funding
• Cash balance age discrimination issues
• 401(k) plan automatic enrollment
• EGTRAA extenders
• Prohibited transaction relief
• And many others.

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Automatic 401(k) Enrollment

• Past problems
• State laws may prohibit
• ERISA preemption debatable
• No 404(c) protection for default investment
• Small account balance for employees who disregard
  notice until after first paycheck

Effective plan years after 12/31/2007
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Automatic Enrollment Relief

• Automatic contribution arrangement
• State laws preempted
• Eligible automatic contribution arrangement
• 90 days to return erroneous deferrals
• 6 months to distribute ADP/ACP corrections
• Qualified automatic contribution arrangement
• ADP/ACP safe harbor
• Top-heavy exemption

Effective plan years after 12/31/2007
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Automatic Enrollment Relief (continued)

• Regulations proposed, November 8, 2007
• New acronyms
• ACA automatic contribution arrangement
• EACA eligible automatic contribution
  arrangement
• Notice at least 30 days and no more than 90
  days prior to the beginning of each plan year
• Upon hire for a new employee in a plan with
  immediate entry

Effective plan years after 12/31/2007
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Qualified Default Investment Alternative (QDIA)

• Final regulations issued October 24, effective
  12/24/2007
• QDIAs
• Life cycle funds
• Balanced funds
• Professionally managed funds
• Manager assumes fiduciary status
• Certain stable value funds may be grandfathered
  into QDIA status
• 30 day notice in advance of eligibility /
  investment
• 30 day annual notice

Effective plan years after 12/31/2006
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Audit Issues

• Can this notice be done electronically?
• What about participants who decide they want out?
• What is the limit on the time period to refund
  automatic deferrals?
• What if this spans year-end?
• What type of documentation is needed?
• Potential for a subsequent event disclosure.

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Audit Issues (continued)

• How do we test the notice requirement?
• How do we test the QDIA status?
• How do we test grandfathered status of stable
  value funds?

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Investment Advice

• Allow party-in-interest to be paid for giving
  investment advice to participants
• Fees dont vary based on option selected, or
• Advice based on computer model
• Standards not yet set for model
• Eligible investment advice arrangement EIAA
• Fees charged cannot vary with the nature of the
  investment suggested
• See Field Assistance Bulletin 2007-01

Effective after December 31, 2006
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Audit Issues

• What fees are the plan paying? Is it consistent
  with the plan document?
• Are the standards for the exemption being
  satisfied?

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Change in Vesting

• Top heavy rules
• Ratable 6 year
• 3 year cliff
• All defined contribution plans, except
• Deferral for bargained plans
• Leveraged ESOPs
• No acceleration for terminated employees

Effective after December 31, 2006
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Diversification

• If invested in publicly traded employer
  securities, participant has right to select
  alternative investment
• Applies
• Immediately to elective deferrals after-tax
  contributions
• After 3 years for employer contributions
• 3-year phase-in for existing for EEs born after
  1950
• Doesnt apply to
• ESOPs (other than KSOPs)
• Owner only plans

Effective plan years after 12/31/2006
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Audit Issues

• Have these new standards been implemented?
• If not, what are the implications on the plan
  financials?

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Defined Benefit Plans

• Major revision of minimum funding rules
• More rapid amortization
• Special rules for at-risk plans with more than
  500 participants
• Special breaks for airlines and others
• Change in handling lump sums
• Restricted for at-risk plans
• Impacts the actuarial valuation
• Potential subsequent event disclosure

Effective plan years after 12/31/2007
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New Benefit Statement Requirements
Effective plan years after 12/31/2006
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Audit Issues

• What was required for 2007?
• What are the consequences for a failure to comply?

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In-Service Pension Distributions

• Pension plans cant make in-service distributions
  before normal retirement age (NRA)
• New law allows in-service distributions at age 62
• A lot simpler than proposed phased retirement
  rules
• No relief for folks wanting to do a phased
  retirement prior to 62
• In May, 2007 regulations were issued allowing for
  in-service distributions after NRA, but not after
  62 where NRA may be later.
• See Notice 2007-8

Effective plan years after 12/31/2006
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Audit Issues

• Does the Plan Sponsor need to amend the plan for
  this or can it be implemented with a plan
  amendment to follow?
• Can they offer this to only one person in the
  plan?
• How does this need to be communicated?
• What is the consequence to the plan if violated?

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Bonding Requirements

• Increase maximum ERISA bond from 500,000 to
  1,000,000 if plan holds employer securities

Effective plan years after 12/31/2007
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Roth 401(k)

• Choice of pre-tax or after-tax deferrals
• Treated the same as a regular 401(k) plan for
  testing, match, distributions and limits
• Participant may change status on future deferrals
  at any time during the year
• No retroactive recharacterization of deferrals
• If using automatic enrollment must establish and
  communicate a default election
• Participant accounting records must separately
  track any after-tax portion
• First effective January 1, 2006

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Audit Issues

• Do you need to make sure that the plan has been
  properly amended?
• How do you track the changes to employee
  contribution type?
• How do you test the access accounts?
• Do you need to test the controls over the
  segregation of records?

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Other Regulations

• Final regulations under Section 415 issued
• Simply formalize all of the legislation received
  to date
• Final regulations under Section 403(b) issued
• Make 403(b) plan look more like 401(k) plans
• Ease the audit process, if implemented
• Final regulations on Cafeteria plans
• Final regulations on nonqualified deferred
  compensation
• Proposed regulations under PPA changes in minimum
  funding

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Wrap Up

• Thanks for joining us today for the 2007
  Roundtable Discussion on the Pension Protection
  Act and Other Regulatory Developments

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Wrap Up

• We welcome any additional feedback on todays
  live forum. Send comments to the Center mailbox
  at ebpaqc_at_aicpa.org.
• Consider using the Centers Online Forum to
  further discuss issues on todays call -
  http//ebpaqc.aicpa.org/Community/MemberDiscussio
  nForum.htm

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Wrap Up

• Consider attending upcoming AICPA EBP Event
• AICPA EBP Accounting, Auditing and Regulatory
  Update Conference in Washington, DC, December 13
  14, 2007

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Wrap Up

• EBPAQC Roundtable Discussion on Alternative
  Investments - January 8, 2008, 100 230 pm ET
• EBPAQC Supervisory Planning for 2008 EBP Audits -
  January 15, 2008, 100 300 pm ET

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Reminder

• EBPAQC Mandatory Center Membership Requirement
  Assessment Compliance Questionnaire has been sent
  to all Designated Partners and if you have not
  done so, please complete online.

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Resources

• EBPAQC Publications
• Pension Protection Act of 2006 Summary
  http//ebpaqc.aicpa.org/NR/rdonlyres/D495F310-C95A
  -4CFB-BA3F-04654F1884CB/0/Pension_Protection_Act_o
  f_2006_summary.doc
• Pension Protection Act of 2006 Summary of Key
  Provisions http//ebpaqc.aicpa.org/NR/rdonlyres/8D
  11FBB7-4058-4ACC-BE81-440B313C5C2D/0/Pension_Prote
  ction_Act_of_2006Key_Provisions.doc

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Resources

• Other links
• H.R. 4, Pension Protection Act of 2006,
  http//frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi
  ?dbname109_cong_billsdocidfh4enr.txt.pdf
• Technical Explanation of H.R. 4
• http//www.house.gov/jct/x-38-06.pdf
• Department of Labor Pension Protection Act Page
  http//www.dol.gov/EBSA/pensionreform.html

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Employee Benefit Plan Audit Quality Center

• Thanks for Participating!