Proposed Changes to the Form 5500 and the AICPA's Response

Regulators submitted a proposal to implement sweeping changes to the forms and regulations that govern annual employee benefit plan reporting on Form 5500. Form 5500 is the primary source of information about the operation, funding, assets and investments of these plans. Regulators are increasingly relying on the Form 5500 as a key component of their enforcement efforts.

On July 21, 2016, the Department of Labor (DOL), Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) published proposed reporting updates for employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The extent of the changes is under debate.

As a whole, these changes are designed to meet five goals: modernize financial reporting, provide greater information regarding group health plans, enhance data analysis, improve disclosures of service provider fee information and improve compliance with ERISA and the Internal Revenue Code. If enacted, the changes would take effect in 2019.

Comments on the reporting updates were due Dec. 5, 2016. The AICPA weighed in and questioned the need for some of the changes, which would significantly increase reporting obligations for employee benefit plans. A joint task force that included the AICPA's Employee Benefit Plan Expert Panel and the AICPA Employee Benefit Plan Tax Technical Resource panel submitted a comment letter on the changes on Nov. 21, 2016.

Three issues in the changes are of particular interest to the AICPA, changes to alternative investment disclosures, the identification of the audit partner in the Form 5500 and the enhanced disclosures proposed to the Form 5500 Schedule C, Service Provider Information.

Alternative Investment Disclosures

Defined benefit plans have actuarially determined obligations and investment targets to meet and accordingly, many defined benefit plans make use of alternative investments to meet these targets. Although defined benefit plans have relied on alternative investments for decades, there is increased interest and usage of alternative investments in defined contribution plans.

Investments that are not listed on over-the-counter markets or national exchanges are considered alternative investments. These include pooled separate accounts, private equity funds, stable value investments, real estate investment trusts and funds of funds. Alternative investments are not subject to the same types of regulatory oversight as traditional investments (i.e., those that are listed on over-the-counter markets or national exchanges).

Under the proposed changes, entities would be required to report more detailed information about alternative investments and other hard-to-value assets. Subcategories would be created for derivatives and foreign investments as well as investments in partnerships and joint ventures on the Form 5500 Schedule H, Financial Information. Additionally, plans would be required to disclose specifics on the alternative investments including interest rate, issuance and maturity dates and current value.

The AICPA issued several comments on the changes to the Schedule H, including eliminating "hedge fund" as a separate category, as well as the proposed requirement to subdivide cash into interest-bearing cash, certifications of deposit and money market accounts. For derivatives, it suggested adding subcategories for exchange-traded or centrally cleared derivative instruments and subdividing the non-exchange traded investment category.

Disclosing the Name of the Audit Partner

In 2015, the Public Company Accounting Oversight Board (PCAOB) adopted rules to provide users of public companies' financial statements with more information about the companies' auditors. Public company auditors now file a PCAOB form that includes the legal name of the firm issuing the audit report, the name of the engagement partner, audit partner identification numbers as well as the participation of other accounting firms participating in the audit.

The DOL appears to be looking for a similar level of transparency for ERISA plans. One of the proposed changes to the Form 5500 includes listing the name of the audit engagement partner on Schedule H.

The AICPA is calling for that provision to be removed, on the basis that the audit partner does not provide the user of the Form 5500 with useful information. Naming the audit partner for the engagement puts unnecessary focus on one individual when an audit team is performing the work of the audit. The AICPA also asked that the DOL rework its language about the audit report to clarify the report does not include the plan's financial statements.

Plan Fees

Regulators are seeking increased transparency about the reasonableness of fees paid to service providers. To bring more focus on plan fees, the proposed changes include adding information about plan fees, including how fees are allocated to plan participants in the Schedule H. Participant-directed defined contribution plans would be required to include an Investment Option Comparative Chart to the Form 5500. Schedule C would also be affected. Plans would be required to file a Schedule C for every covered provider who received more than $1,000 from plan administration fees and a Schedule C for a non-covered provider who received $5,000 or more.

The AICPA voices its general support for the increased transparency surrounding plan fees, but it recommended a clearer definition for contract administrator fees, which could be confused with the accounting and bookkeeping fees already reported in the plan's income and expense statement. It recommends adding additional administrative expenses, Form 5500 preparation fees and PGBC premiums. In current practice, these expenses may be recorded in different places including contract administrator fees, audit fees or recordkeeping fees.

Limited Scope Audits

Under the DOL limited scope audit exemption, a plan can exclude from an auditor's examination certain assets that are held by a bank, or similar institution or an insurance company. While this remains an option for certain plans, the DOL has long targeted the limited scope exemption as a provision to change. In its 2014 employee benefit plan audit quality report, the DOL recommended eliminating the limited scope exemption.

The proposed changes recommend that plans electing a limited scope employee benefit plan audit submit limited scope audit certifications supporting their response to Schedule H, Accountant's Opinion (Line 3b). In its comment letter, the AICPA recommended additional information be provided in the Schedule H, including naming the service provider that certified plan investment information to meet the limited scope exemption. Additionally, it asks that plan administrators confirm that they are responsible for determining if the audit meets the qualifications for the limited scope exemption.

Monitoring the Changes

These and other updates to the reporting requirements for Form 5500 should be closely monitored.

The revised reporting requirements, if adopted, generally would apply for plan years beginning on and after Jan. 1, 2019. MHM will keep be keeping you informed of any new developments.

For specific comments, questions or concerns about how the proposed changes may impact your plan reporting, please contact Hal Hunt of MHM's Professional Standards Group. Hal can be reached at 816.945.5610 or hhunt@cbiz.com.