Employee benefit plan concerns related to COVID-19
The COVID-19 pandemic has resulted in serious economic concerns for businesses across numerous industries. Among the many consequences of COVID-19, employee benefit plans may face operational challenges and financial reporting complications. Plan sponsors, auditors and all other service providers need to be prepared to address the potential effects that COVID-19 may have on the plan and the individual participants for the plan year ended December 31, 2019, and beyond.
For the plan year ended December 31, 2019, there are accounting and reporting related issues that employee benefit plans (EBP) need to evaluate. These issues include the collectability of outstanding participant loans at year-end and potential disclosures related to risks and uncertainties and subsequent events (both type I and II). There may be situations where employees do not receive their regular pay as a result of COVID-19 and therefore, may be unable to make the required payments on an outstanding participant loan.
FASB Accounting Standards Codification (FASB ASC) 275, Risks and Uncertainties, requires disclosures that focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the EBP. The risks and uncertainties addressed can stem from the nature of the plan’s operations, the use of significant estimates, and current vulnerabilities due to certain concentrations.
FASB ASC 855, Subsequent Events, defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. For calendar year-end 2019 financial statements, any COVID-19 related subsequent events identified are likely to be non-recognized subsequent events (Type II).
Operating, accounting, and reporting issues for 2020 and beyond include numerous areas that plan sponsors and auditors need to be prepared to address. As EBP participants face financial difficulties, this may result in an overall increase in the number and dollar amount of participant loans issued. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides a temporary increase in the loan limit for qualified individuals that is limited to the lessor of 50% of their vested account balance up to $100,00 on loans issued between March 27, 2020, through September 23, 2020.
The CARES Act also provides that any loan payments due between March 27, 2020, and December 31, 2020, can be delayed for up to one year and the five-year repayment period will disregard for the 2020 year. The number and dollar amount of hardship distributions may also increase. The CARES Act allows qualified individuals to take a coronavirus-related hardship distribution of up to $100,000 from their retirement plan subject to the same IRS safe-harbor rules.
Eligible hardship distributions can be taken up to December 31, 2020. Furthermore, qualified individuals may take a coronavirus-related distribution up to $100,000 that is not subject to the 10% early withdrawal penalty. The tax associated with the coronavirus distribution may be repaid over a three-year period. The plan administrator may rely on an employee's certification that the employee satisfies the conditions for a coronavirus-related distribution. The required minimum distributions from defined contributions plans have also been temporarily suspended for 2020 as part of the CARES Act.
For single-employer defined benefit plans the CARES Act defers 2020 minimum required contributions (including quarterly contributions) for single-employer plans to January 1, 2021. The amount of any deferred contributions is increased by interest accruing for the period between the original due date for the contribution and the payment date, at the effective rate of interest for the plan for the plan year which includes such payment date.
During these uncertain times, plan sponsors must also consider whether or not internal controls are operating in accordance with their design or do they need to be modified and adjusted in order to properly address remote work environments. Furthermore, the remote work environments result in heightened concerns related to information and data security. As employees transition and adjust to working remotely, the concern is regarding the personally identifiable information and protected health information associated with EBPs that may be at risk.
Plan sponsors may experience significant financial difficulties during this time that may result in delayed or eliminated employer contributions, as well as potential delays in transmitting amounts withheld from participants’ wages. The plan document language must be carefully evaluated to determine if and how the plan sponsor may delay or eliminate any employer contribution. Please note that as of the date of this newsletter, the Department of Labor (DOL) and the Internal Revenue Service (IRS) have not provided any reporting relief related to prohibited transactions.
Due to employer-initiated severance, partial-plan terminations may also be triggered for those plans that are not 100% vested in employer contributions. Determining whether or not a partial termination has occurred is based on facts and circumstances, especially in cases where many of the employees may be rehired at a later time in the same year.
EBP auditors should also consider how COVID-19 will impact the audit. The traditional audit may no longer be a viable option as many businesses are closed and embracing a remote work environment. Remote auditing procedures may need to be designed and embraced in order to continue to meet the needs of the client. Planning procedures, risk assessments (including fraud risk), and internal controls will be areas of heightened concern associated with remote audit procedures. The use of secure web portals and video conferencing will become more prevalent during these uncertain times. As noted above, financial statement reporting and disclosures will also need to be carefully considered related to emphasis of matter paragraphs, fair value estimates, risks and uncertainties, subsequent events and potential going concern issues.
In a press release on March 25, 2020, the Securities and Exchange Commission (SEC) announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public registrant filing obligations under the federal securities laws, including plans that file a Form 11-K with the SEC pursuant to Section 15(d) of the 1934 Act. The SEC issued an order (SEC Order) that, subject to certain conditions, provides public registrants with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020.
The Department of Labor and the Internal Revenue Service are expected to grant Form 5500 filing relief and other regulatory relief, however at the time of this newsletter there has been no announcement.
By working closely together, plan sponsors and auditors can help ensure that employee benefit plans continue to remain in compliance with the rules and regulations during these difficult and stressful times.
The content contained in this article is for information purposes only and not tax advice. You should consult your own tax advisor for tax advice that applies to your particular situation.
Melissa G. Critcher, CPA attended Appalachian State University where she received a bachelor of science degree in accounting. Throughout the course of her career, she has worked with small and large, local and regional firms across North Carolina. Currently, Melissa has her own practice located Charlotte, North Carolina. She has extensive experience in auditing and accounting, which includes manufacturing, professional service, healthcare and retail industries with a specialization in employee benefit plans. Currently, her practice concentrates on auditing employee benefit plans and consulting with CPA firms and plan sponsors. She has served as a member of the NCACPA board of directors, committee member for the NCACPA accounting and attestation committee as well as local chapter positions for the NCACPA.