Transcript Slide 1

What to Expect in a Plan Audit
Presented By:
Amper, Politziner & Mattia, LLP
Kriste Naples-DeAngelo, CPA, MBA, Partner
Brenda DeSaro, CPA, Manager, Pension Services Group
Diane M. Wasser, CPA, Partner-in-Charge, Pension Services Group
Is your plan an ERISA Plan?
IF YOU ARE UNSURE,
SEEK LEGAL COUNSEL!!!!!!!!!!!!
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Form 5500 Requirements
(Prior to 1/1/09)
• Current Form 5500 filing requirements (for those required):
― Limited Pension Plan Reporting for “403(b) Arrangements”—
Required only to complete general information section
(Lines 1 through 6 and Line 8)
― No Form 5500 schedules required to be completed
― No financial statement or any financial information required to be
submitted
• No audit required
• Timing
― 5500 is due 7 months after the plan’s year end
― Extension available for 2½ months
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Form 5500 Filing Requirement
(Beginning 1/1/09)
• Form 5500 filings will be required for all 403(b) Plans covered by Title I of
ERISA (as under previous rules)
• They are now subject to the same 5500 annual return requirements
• Even Plans with less than 100 participants must file Form 5500 and provide
financial information, at the Plan level, never provided before
• No change on WHO should file Form 5500
• Change only on WHAT should be filed with Form 5500
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Form 5500 Filing Requirement
• Starting with the 2009 Form 5500 (effective for plan year
beginning January 1, 2009)
– 1/1/09 (December year end)
– 7/1/09 (June year end)
• Generally an excess of 100 eligible participants at the
beginning of a plan year will require an audit
• Eligible—BE CAREFUL!—includes all employees under the
Universal Availability rule and all former participants with
account balances
• 7,000 403(b) audits, 9,000 small plans with additional
financial information to report
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Form 5500 Requirements
• 80-120 rule applies in the initial 403(b) audit year
• The Department of Labor advised in its Notice of Adoption of Final
Forms Revision that 403(b) plans that were eligible to file as a
small plan under DOL Reg. 29 CFR 2520.103-1(d) in the previous
year and that have participant counts of fewer than 121 in the
beginning of the 2009 plan year can file as small plans under the
new filing rules
• Plans with over 120 participants at the beginning of the year
(01/01/09 for calendar year plans) will be required to attach
audited financial statements to their 2009 Form 5500 filing
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Financial Reporting Requirement
WHAT IS THE OBJECTIVE OF THE AUDIT?
• To express an opinion on whether the plan’s financial
statements are presented fairly, in all material respects, and in
conformity with U.S. generally accepted accounting principles
• The auditor is responsible to plan and perform the audit to
obtain reasonable assurance that material misstatements are
detected
• Reasonable assurance is high, but not absolute
• The audit is conducted in accordance with auditing standards
generally accepted in the U.S.
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Financial Reporting Requirement
WHAT IS THE OBJECTIVE OF THE AUDIT?
• Generally accepted auditing standards among other
things includes:
― gathering information to understand the Plan and its internal
control environment
― understanding the design and implementation of internal control
― detailed testing of a Plan’s accounts and transactions
― gathering sufficient audit evidence
― documentation of findings
• The financial statements are the responsibility of
Plan Management, the opinion is the auditors
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Financial Reporting Requirement
WHAT IS AUDITED?
• Two Basic Buckets (Investments and Participant Accounts &
Activity)
―Investments
―Participants
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Opening balance
Eligibility
Contributions
Distributions
Transfers in and out
Earnings allocations
Fund allocations
Vesting
Ending balance
• Timeliness of Contributions
• Prohibited transactions
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Financial Reporting Requirement
WHAT IS AUDITED?
• Think in terms of the financial statement line items
• Statement of Net Assets Available for Benefits:
― Investments
― Participant loans
― Receivables (accrual basis)
• Participant contributions
• Employer contributions
• Income
― Liabilities (not for benefits)
• Accrued expenses
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Financial Reporting Requirement
WHAT IS AUDITED?
• Statement of Changes in Net Assets Available for Benefits:
― Contributions (received and receivable)
• Timeliness of deferrals
― Rollovers
― Gains and losses/appreciation and depreciation on investments
― Investment income
• Interest and dividends
― Distributions
― Administrative expenses
― Transfers/plan mergers
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Financial Reporting Requirement
WHAT IS AUDITED?
• The focus of the audit is on the material account balances
and major transaction classes from which the statements are
derived
• Participant activity is a major transaction class
― Opening balance, eligibility, demographics, contributions, vesting,
distributions, transfers, rollovers, fund allocations, earnings
allocations, ending balance
• Focus on investments is driven by the audit scope
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Financial Reporting Requirement
WHAT IS AUDITED?
• Investments – Limited Scope or Full Scope Audit
― Limited Scope—assets are held by a bank, insurance
company or trust company, and are certified as to
completeness and accuracy
• Custodians certify the information as contained in their ordinary
books and records—If you have more than one custodian, you
will need multiple certifications
• Custodians generally provide values based on best information
available
― Watch “as of” dates for old information
― Watch fair value
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Limited Scope (continued)
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Auditor has no responsibility to test investments, investment activity
and related transactions—(it is the Plan Sponsor’s responsibility to
ensure that the investment values are proper)
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Must consider applicability of the limited scope audit, given the
circumstances regarding the availability of the information on
prior contracts—(will be discussed further in presentation)
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Financial Reporting Requirement
WHAT IS AUDITED?
• Full scope—Audit investments, investment activity and
related transactions
― Confirm existence and ownership, assure no liens,
no pledges or other security interests
― Reasonably conclude investment transactions are
recorded and investments are valued in conformity
with GAAP (fair value)
― Disclosures are proper
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Financial Reporting Requirements
FIRST YEAR CONSIDERATIONS
• DOL requires comparative statements of net assets available
for benefits
• Will need 12/31/08 or 6/30/09 statement of net assets available
for benefits, at a minimum, compiled
• A compilation is less than an audit and a compilation report will
be rendered
• Must determine that the accounting principles used by the Plan
in the current and preceding year are consistent
• Must address the opening balances at the participant level
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Financial Reporting Requirement
FIRST YEAR CONSIDERATIONS
• Address completeness and accuracy of participant data &
records
―Address eligibility, types of benefits, participant account
balances
• Opening balances at the participant level
―Essentially must address multiple prior years’ activity
• Contributions
• Distributions
• Other plan activity
• Going back in time presents a unique difficulty for 403(b)
Plans given the possible recordkeeping shortfalls
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DOL Transition Relief
• FAB (Field Assistance Bulletin) 2009-02 provides transition relief for those that
make a good faith effort…… whereby, they do not need to treat annuity
contracts and custodial accounts as part of the employer’s Title I plan assets and
for purposes of ERISA’s annual reporting requirements
• Must meet certain criteria
― Contract was issued to a current or former employee prior to 1/1/09
― Employer ceased to make any contributions (including salary
reduction contributions) to contract or account prior to 1/1/09
(including loan repayments made by employer)
― All rights and benefits under the contract are legally enforceable
against the insurer to custodian by the individual owner without any
involvement of the Employer, AND
― The individual owner of the contract is fully vested in the contract or
account
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DOL Transition Relief
• Field Assistance Bulletin (“FAB”) 2009-02
― Issued July 20, 2009
― Provides guidance to DOL Field Offices
― Provides Enforcement Relief for 5500 filings
• Does not provide audit relief
― DOL/EBSA will NOT reject a 403(b) plan form 5500 filing solely
because the auditor’s report is qualified, adverse or disclaims an
opinion (other than allowed under 29 CFR 2520.203-8) due to
the exclusion of pre 2009 annuity contracts and/or custodial
accounts
― Regardless of the type of opinion issued, the auditor is still
required to complete all other audit procedures (e.g.
contributions, distributions, etc.)
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DOL Transition Relief
• You can use this relief to determine audit requirement – if by
omitting these contracts puts the plan below the audit
requirement threshold, then an audit will not have to be
performed
• 80-120 rule also applies in determining audit requirement so look at
number of participants at 1/1/08
• The FAB allows but does not require that contracts/accounts be
excluded
• The FAB also applies to years beyond 2009
• ERISA and current regulations require the audit to be performed in
accordance with (GAAS)
• The exclusion by the plan sponsor of contracts/accounts that meet
the criteria of the FAB will likely prevent the auditor from being able to
issue an unqualified opinion or limited scope opinion under 29 CFR
2520.103-8
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DOL Transition Relief
• Some sponsors may not find a qualified, adverse or
disclaimer of opinion’s acceptable
• Some vendors will not be in a position to exclude
contracts/account information that meets criteria
• DOL’s exception is for a “good faith” effort to comply with
the ERISA annual reporting requirement
• DOL is working on additional guidance
• AICPA 403(b) task force is working on additional tools
• MORE GUIDANCE TO FOLLOW!
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Preparing for the Annual Audit
• Generally information is available within 2 months
of year end
• A 401(k) audit from start to finish can take 1-2
months with fieldwork generally one week or less
• 403(b) timing and fieldwork could be double,
given the initial time through
• Availability of SAS 70’s must be addressed
(addressed in subsequent slide)
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What Does a SAS 70 Mean
to a Plan Sponsor?
• It is important to keep in mind that auditors, under professional
standards, cannot be a part of a plan’s internal control
• Controls of a benefit plan are comprised of controls at the plan
sponsor as well as at service organizations
• SAS 70’s are reports on the design of internal controls (Type I)
and operating effectiveness (Type II) at a service provider.
Outlines what user controls are required
• Not only useful for the Auditor
• Review by Plan Management at least annually as part of the
third party service provider monitoring effort, is good practice
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Preparing For The Annual Plan
Audit Complete Collaboration
Plan Sponsor
Service Providers
TPA’S
Auditor
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How to Prepare for the Annual
Plan Audit
• Take control of the process!
• Know your responsibilities—the financial statements are
those of plan management—only the opinion is the
auditor’s
• Hire a qualified independent auditor for your plan
• If not provided by the auditor, request a list of schedules
and documents the auditor will require prior to the start of
the process
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How to Prepare for the Annual
Plan Audit
• Contact service providers early each year to assure they
have the necessary information TO YOU on a timely
basis. If you have not already contacted them for your
2009 plan audit, CONTACT THEM NOW!
― All individual participant contracts and account balances in your
plan
― SAS 70 Reports (Is it a type I or Type II)
― Information needed for 2008 compiled financial statements and
information needed for opening balances testing
• Have a point person. Establish responsibility for the
Plan’s financially reporting function. (HR vs. Finance)
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How to Prepare for the Annual
Plan Audit
• Review information before it is provided to the auditor to
minimize the back and forth
― Make sure plan participant records are complete and
accurate
― Get your books and records in shape
― Establish proper internal controls over the plan’s financial
reporting process
― Ensure that the plan has an up to date written plan
document and an investment policy statement
― Ensure that the plan is in compliance with the plan’s tax
exemption
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How to Prepare for the Annual
Plan Audit
• Expect great things! (Embrace the process)
― Communication throughout the process
― Innovative ideas
― Suggestions on enhancing procedures for efficiency
and minimization of risk
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How to Prepare for the Annual Plan Audit
What To Expect From the Auditor?
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List of schedules and documents required
Inquiries
Understanding of Internal Controls
Risk Assessment
Requests for documentation of participant level information
Experience
Knowledge of plan terminology
Clear line of communication
Helpful recommendations!
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How to Prepare for the Annual Plan Audit
What The Auditor is Expecting of You?
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Time
Documentation requested
Full analysis of vendors
Full analysis of participant population
Coordination of communication with third party providers
Financial statements
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How to Prepare for the Annual Plan Audit
How TPA’s Can Help and What Should They
Provide?
• Share Auditor request listing with the TPA
• Organized audit package
• Detailed listing of participant balances
• 157 information (assistance with information)
• Draft Form 5500 and all related schedules
• Compliance and discrimination testing
― Universal availability
― ADP (Actual Deferral Percentage Test) and Top Heavy testing
not required
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How to Prepare for the Annual Plan Audit
How TPA’s Can Help and What Should They
Provide?
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Allocation of employer contributions
Loan roll-forward report/delinquent loan reports
Distribution report
Transaction information
SAS 70 report, if available
Timely response to inquiries resulting from the annual
audit
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Challenges / Suggestions
• Critical to employ fiduciary best practices, somewhat
lacking in the 403(b) plan area
• Plan Committees
― Meet regularly
― Keep written minutes
― Document fiduciary due diligence
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Investment Policy Statements
ERISA attorney relationships
Monitor service providers
Employ effective internal controls
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Challenges / Suggestions
• Gather complete and accurate information from all
vendors, for all years
― Former employees and former vendors
― Orphan contracts and missing participants
• Effectuating information sharing agreements
• Careful documentation of data collection process is
essential
• Beginning balances require certain audit procedures
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Helpful Websites & Tools
• Plan Sponsor Magazine
• Profit Sharing Council of America (IPS)
• Employee Benefit Plan Audit Quality Center
― Website: www.aicpa.org/ebpaqc
• Includes Plan Advisories for communication and research on plan
responsibilities
• Includes tools for Plan Sponsors
• Your Third Party Provider
• www.dol.gov
• Employee Benefits Security Administration
Office of the Chief Accountant: 202.693.8360
• EFAST Help Line: 1.866.463.3278
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New Reporting Requirements
for Form 5500
Department of Labor Update
• Electronic filing of form 5500 Effective years beginning on or after 1/1/09
― EFAST 2 – secure web portal filing system
― Free DOL website based filing options—IFILE System
― TPA value added software—go onto DOL website for approved
vendors
― EFAST 2 will help reduce errors and make information more accessible
― There will be no more 30 day letters. Will just get a 45 day letter
and the next letter will be to assess penalties!
― Effective 1/1/10 EFAST (Old system) will only process 2008 form
5500 filings. All prior year filings will have to use EFAST2 (new
system)
― After 10/15/10 no paper 5500 forms will be accepted
― NOTE: Filing under the new EFAST2 system may require additional
time so this should be taken into consideration before the 10/15/10
extended deadline.
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2009 Annual Reporting with EFAST2
• Mandatory beginning 1/1/10 and includes:
― Plan Sponsor is required to maintain a hard copy
― Short plan year 2009 filings—If due date is before
1/1/10, given an automatic extension to electronically
file a complete form 5500 on EFAST2 within 90 days
after the 2009 filing system is available on the DOL
website. Can file on paper using 2008 forms but it
must be submitted prior to 1/1/10
― 2 ways to create and submit filings
• IFILE (free web-based filing application through DOL
Website)
• Third Party Certified Software (make sure they are
approved)
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2009 Annual Reporting with EFAST2
• Getting Started in EFAST 2
― All filers must register for filing credentials whether
using IFILE or third party software.
― Go to www.efast.dol.gov and click “register”
― Types of credentials
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Filing Author
Filing signor
Schedule Author
Transmitter
Third-Party Software Developer
― Credentials are assigned to individuals, not
companies and will expire if not used for 3 years
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EFAST2 Credentials
• 1 - Filing Author —You can complete the 5500, attach
schedules, submit the filing and check the filing status.
(Many TPA’s will be fulfilling this role.)
• 2 - Filing Signer —This is for the individual(s) that would
normally manually sign the 5500 (Plan Administrators,
Employers/Plan Sponsors and Direct Filing Entities). Just
like when it was manually signed, by electronically signing
the Form 5500 you are indicating that to the best of your
knowledge the Form and all it’s schedules and attachments
are true, correct and complete. You are also legally
responsible for making sure the filing is submitted timely.
This mostly likely will be the credential most of you will
need.
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EFAST2 Credentials
• 3 - Schedule Author —Complete 1 or more schedules that
will go with the 5500 filing. This schedule must be
exported. Once exported the filing author will import the
schedule(s) to the correct filing. (If you use a TPA to
prepare and file your 5500 this credential will not be
necessary for you.)
• 4 - Transmitter —You will transmit the 5500 filing to the
EFAST2 system. (If you use a TPA they will handle this
area.)
• 5 - Third-Party Software Developer —Used to create test
cases using their software to achieve certification for their
software.
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EFAST2 Process
• Audited Financial Statements —Your auditor will need to
send you the audited opinion to go with the financial
statements on the auditor’s letterhead, signed and in PDF
(portable document format) file. The PDF will then be
attached to the 5500 filing. Be aware there could be
some file size issues. Not filing the audited financial
statement will more than likely trigger an error on the
EFAST2 system and the error will need to be corrected
quickly or the filing will be rejected.
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EFAST2 Process
• Extension – Complete the paper Form 5558 and submit it
to the Internal Revenue Service. When you electronically
file your Form 5500 on the EFAST2 system you do NOT
need to attach a copy of the previously filed Form 5558.
• Submission – The Transmitter or Filing Signer should
check the filing status either on-line or on the help line 1866-463-3278.
• Filing Status – “Filing Received, Filing Stopped or Filing
Error”. If the status is Filing Stopped or Filing Error action
must be take to correct the Filing quickly.
• NO SOCIAL SECURITY NUMBERS
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Prepare for the New Schedule C
Purpose/Objective
• Report plan related fees and expenses (New codes – use all that apply)
• Facilitates annual review of plan’s fees and expenses as part of a
fiduciary’s on going obligation to monitor service provider arrangements
• Report terminated accounting firms and individual actuaries
• Schedule C has 3 Components:
― Identification of each person/service provider who received directly
or indirectly $5,000 or more in total compensation in connection
with services rendered to the plan or their position with the plan
during the year.
― Identification of fiduciaries or service providers who failed or
refused to provide information necessary to complete part I of
Schedule C
― Terminated accounting firms s and individual actuaries
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Prepare for the New Schedule C
• Direct Compensation—“Payments made directly by the plan
for services rendered to the plan or because of a person’s
position with the plan are reportable as direct compensation.
Direct payments by the plan would include, for example,
direct payments by the plan out of a plan account, charges
to plan forfeiture accounts and fee recapture accounts,
charges to a plan’s trust account before allocations are
made to individual participant accounts, and direct charges
to plan participant individual accounts. Payments made by
the plan sponsor, which are not reimbursed by the plan, are
not subject to Schedule C reporting requirements even it the
sponsor is paying for services rendered to the plan.” (5500
2009 instructions)
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Prepare for the New Schedule C
• Indirect Compensation —“Compensation received from sources other than
directly from the plan or plan sponsor is reportable on Schedule C as indirect
compensation from the plan if the compensation was received in connection with
services rendered to the plan during the plan year or the person’s position with
the plan. For this purpose, compensation is considered to have been received in
connection with services rendered to the plan or the person’s position with the
plan if the person’s eligibility for a payment or the amount of the payment is
based, in whole or in part, on services that were rendered to the plan or on a
transaction or series of transactions with the plan. Indirect compensation would
not include compensation that would have been received had the service not
been rendered or the transaction had not taken place and that cannot be
reasonably allocated to the services performed or transaction(s) with the plan.
Persons that provide investment management, recordkeeping, claims processing,
participant communication, brokerage, and other services to the plan as part of an
investment contract or transaction are considered to be providing services to the
plan for purposes of Schedule C reporting and would be required to be identified
in Part I if they received $ 5,000 or more in reportable compensation for providing
those services.” (5500 2009 instructions)
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Prepare for the New Schedule C
• Common Service Providers Who May Receive Indirect Comp
― Investment Manager
― Broker
― Recordkeeper
― Transfer Agent
― Distributor
― Trustee/custodian
• Examples of Indirect Compensation
― Commissions (including soft dollars)
― SEC Rule 12b-1 distribution fees
― Float revenue (if making distributions and held in an interest bearing
account that earns interest)
― Finders Fees
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Prepare for the New Schedule C
• Exceptions From Reporting
― Plan employee compensation < $25,000
― Person’s whose only comp was reported on Schedule A
― Sponsor who was not reimbursed by Plan
• Other Important Changes
― Reportable comp includes brokerage fees and
commissions, now regardless of whether broker has
discretion
― For further help look at the “FAQ’s About the 2009 Form
5500 Schedule C” on www.dol.gov
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Prepare for the New Schedule C
• Reporting Gifts and Other Non-Monetary Compensation
― Must be reported
― Limited de minimus exception
― Instructions caution filers that gifts and gratuities of any amount
paid to or received by plan fiduciaries may violate ERISA and give
rise to civil and criminal liabilities
• Limited Exceptions for Reporting Gifts and Non-Monetary Comp
― Valued at less than $50
― Aggregate value of gifts from one source less than $100 in calendar
year
― Gifts with value less than $10 do not have to be counted towards
$100 limit
― If $100 aggregate value is exceeded, the value of all gifts will be
reportable
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Prepare for the New Schedule C
• Excludable Non-Monetary Compensation —“You may exclude
non-monetary compensation of insubstantial value (such as
gifts or meals of insubstantial value) that is tax deductible for
federal income tax purposes by the person providing the gift or
meal and would not be taxable income to the recipient. The gift
or gratuity must be valued at less than $50, and the aggregate
value of gifts from one source in a calendar year must be less
than $100, but gifts with a value of less than $10 do not need to
be counted toward the $100 limit. If the $100 aggregate value
limit is exceeded, then the value of all the gifts over $10 will be
reportable. Gifts received by one person from multiple
employees of one entity must be treated as originating from a
single source when calculating whether the $100 threshold
applies.” (5500 2009 instructions)
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“The material contained in this
presentation is for general information
and should not be acted upon without
prior professional consultation.”
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