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this tutorial is a project of nonprofit accounting basics org a free resource developed by the Greater Washington Society of CPAs educational foundation our goal is to encourage accuracy and accountability to help smaller nonprofits successfully manage and sustain their organizations hello my name is Sean Miller I'm a partner in the DC office of caliber CPA group and a member of the Greater Washington society nonprofit financial accountability task force and today we're going to talk about employee benefit plan basics and how those relate to nonprofits first of all what are employee benefit plans there are multiple types of them some of the main ones obviously there's retirement plans you have defined benefit plans you have defined contributions plans under those you have sub sub plant subsections of plans you have 401k plans 403 B plans 457 plans all various types of retirement plans then you also have health and welfare plans you can have a defined benefit health and welfare plan those are rare but you do see them can have health savings account flex bending accounts these are all various types of benefit plans today we're going to focus primarily on the retirement plan side of things since those are the most common what people have most frequently out there so just to make sure we have a baseline and everyone understands what we're talking about what's some terminology related to benefit plans you're gonna hear throughout this presentation and in general the first thing you're gonna hear a lot of is called ERISA the Employee Retirement Income Security Act and this is the primary law that governs employee benefit plans been around for a number of years and that's what dictates most of the laws that are followed here EBS a so that's the Department of Labor they're sub agency the employee benefits Security Administration and they have oversight over benefit plans so both from an audit side and from enforcing ERISA that's their responsibility TPA that's a third-party administrator your Hill that tossed around a lot and that's a service provider who handles the plan administration typically you'll see this in a 401k plan situation whether it be a large brokerage firm like a fidelity or Tia craf or there's other firms and that's all they do is just administer the plan they'll handle enrollments payments eligibility determinations loans and all the administration side of things so those are three terms that you're going to need to know as you get into the employee benefit plan world a few other things that you're gonna hear party an interest that's a phrase it comes up on the form 5500 which we'll talk about shortly essentially as a related party or an interested party to the plan prohibited transaction again this is something you'll hear hopefully not very frequently with your own plan but you will hear and these are transactions that are prohibited specifically prohibited by ERISA they have to be disclosed and they audit and the tax return you have these these lead to audits we talk about the EBS a they look to these you definitely don't want any prohibited transactions that being said you need to know what they are and need to know where to find them and when we get to the the end of the presentation there's some links to some good resources both on the Department of Labor website and on the IRS website and lastly vesting again more common in a 401k plan and defined benefit plan vesting is the amount of time it takes you to fully earn your benefits right most people know what this is you start working somewhere maybe you need to be there five years before you vest in the employer portion of contributions to benefit plans again something you need to know so what are the different features of different benefit plans what separates one from the other defined benefit plans very rare these are the old-style pension plans that you know we've all heard about there are some industries and some organizations that still have defined benefit plans but you see them less and less participants are guaranteed a fixed amount in retirement payments so depending on how you select your retirement and how long you select to get these payouts the company guarantees you're gonna get X dollars per month for a certain number of years no risk to the participant there have to have an actuary so the actuary determines what the contribution is that the company has to make to the plan based on several assumptions including things such as investment return which as we all know could be all over the place the amount of time people work average retirement age mortality tables right so when someone retires how long are they going to live after that retirement is a factor so these determinations are just based on a wide array of assumptions that can be all over the place you know the key thing to one of these type plans is this next one employers assume all the risk for the investment earnings right so you as a participant are guaranteed a certain dollar amount the employer makes that risk that however much they invest on your behalf is gonna get them to be able to pay you out that amount of money and if the investments don't earn enough they're gonna have to kick in the difference and for the auditors there's a lot of financial statement disclosures that are required when you have a defined benefit plan actuarial information the investment to the plan different assumptions possibly pages and pages of disclosures again these are a rare you see them less and less than you did 20 years ago or so so defined contribution plans much more common you'll see these anyone can have one of these small companies large companies I'm 401k plans 403 B plans are the most common I'm at one point nonprofits couldn't tap 401 k plan so you saw 403 B plans much more frequently now that 401 k plans are acceptable for nonprofits you see that a lot more but similar in terms of what we're talking about here they can be contributory or non-contributory meaning the employer can make a contribution on your behalf of the plan or not it could be solely where the participant makes contributions they can have loans to the participants right typically up to a certain dollar amount for certain purposes and with certain eligibility requirements again with that vesting policy you can take a loan on your 401 k plan or through b plan account and that's another big difference so each participant in a defined contribution plan has her own account you work for an employer has 50 employees in that plan each of those 50 participants is tracked separately now not necessarily the own investment account but their own record-keeping account so you know exactly how much they've contributed what they're invested in how much they've earned in their account as opposed to the defined benefit plan where it's just a lump sum pool of money the biggest advantage to a 401 k plan again as participants make pre-tax deferral contributions and so we all know how this works you out of your paycheck you make a contribution that then is non-taxable so you're you're getting the benefit there on the flip side because of that you assume all the risk for investment earnings basically what you're saying is I'm gonna take my money I'm gonna decide where to invest it in and hopefully when I get ready to retire there's gonna be enough of a nest egg there to carry me through the rest of my retirement it's a much different than the defined benefit plan again why it's this is much more popular as there's much less risk on the company side and significantly less financial statement disclosures for the the auditors in the bunch deferred compensation plans we see these some times a lot of times are called 457 plans again participants defer a portion of their income on a pre-tax basis typically you'll see this more your c-level your executive directors presidents of organizations whereas as an incentive and as a bonus they'll get these deferred compensation plans allow them again to defer an additional piece of their income till the retirement age when you know theoretical they'll be paying less in taxes and and they'll get that benefit the thing to know about define these 457 plans and deferred compensation plans is technically the assets remain assets of the organization so you're gonna have an asset and a liability on your book for that same number they're also subject to the claims of the creditors of the organization from a company standpoint that probably doesn't have much impact but from the individual with the deferred compensation plan that's important to know because what that means is until you start collecting that money it's not yours right if the entity that offers you this 457 plan goes bankrupt has some big lawsuit against it the money that's in that 457 plan could go away in a second so again those are the the main differences between the the plans that are out there again the 401 K and the 4 3b are far and away the most common so what are some of the financial requirements of an employee benefit plan all right you need to know these if you're doing an audit you also need to know them your internal you know you're running a non-profit maybe you're a trustee of your your company's 401 k plan because you're the financial person so you need to know what it is that you need to do to comply with these regulations again as a trustee you have the obligation for this compliance so audits do plans need an audit so essentially the rule is plans with over a hundred participants for the most part need to have annual audits and for a number of years this didn't apply to 403 B plans however probably bout five years ago now this did does now apply to 403 B plans so pretty much any plan that you're gonna have if you have over a hundred participants you're gonna have to have an annual audit if you have a plan whose assets are held in a trust those have to have an audit and those are all based on the requirements of the form 5500 which we'll get to in a second now one thing that a lot of defined contribution plans do and they're allowed to do under the law its have what's called a limited scope audit and what this means is that essentially the plan auditor relies on a certification from the trustee for the investment related amounts on the financial statements trustee being the investment custodian again a fidelity at tiaa-cref's someone like that or your bank whoever is holding the money and this again allows the auditors to really reduce the amount of testing that they need to do on the investments and focus more on the plan activity itself payment eligibility things like that so again it reduces the amount of time involved hopefully reduces the fees and so on so it really makes things a little bit easier what type of tax filings our benefit plans are required to have again this is for retirement plans primarily so benefit plans file was called a form 5500 and it gets filed with the IRS but it also is then shared with the Department of Labor - excuse me as we mentioned the EBS a is under the Department of Labor so even though the form is filed with the IRS it then goes over the Department of Labor so both groups have access to this information again for plans with over 100 participants the annual audit must be attached and unless you have what we talked about earlier with the limited scope water you need to have an unqualified opinion attached to your form 5500 the forms do seven months after year-end and you do have a three and a half month extension available so again you need to coordinate all this with your auditor if you are an audit or you need to coordinate it and make sure you schedule properly if you're running the nonprofit and on the financial internal financial side you need to make sure all this is scheduled and that you you know these dates I'm the financial information on the form 5500 schedule HR I depending on the the size of the organization it's really just a small piece of the form itself you have to list out your bound cheating your your income statement and so on but there's a lot of other disclosures required most notably is what's referred to a Schedule C on this form yet to list all your service providers who were paid over five thousand dollars what they were paid for how much they were paid if there's a relationship between the plan and the provider so a lot of that lot of information you're gonna have to get from your service providers neither VI n number their address to get not something that can necessarily be done at the last minute so you need to make sure you plan that out properly so also as part of a your financial requirements there with a benefit plan there's other things you're going to need to do typically these will be done by a plan administrator done annually so you're really not not involved too much other than providing data to these on there's discrimination testing and top heavy testing which are really geared towards the 401 k plans making sure that the senior executive level people at in the plan at the organization aren't benefiting more than everybody else is and for this testing you have to do there if you fail you may have to refund a portion of the contributions I've never seen it get to a situation where plans get penalized and revoked and get their status revoked and so on but they're ours there is other testing that needs to be done and again all these things when you have a benefit plan you just need to be aware of and make sure you're on top of all of those so just to wrap up some place you can get some additional information which I would definitely encourage you to look at if you're new to the employee benefit plan world if you just became a trustee in a plan or you're thinking about implementing a plan at your organization the Department of Labor has some good websites under the EBS a 1/4 for 3b plans one for small employers the Internal Revenue Service has a couple good sites they're related to for 1k plans and then just a frequently asked questions for retirement plans in general so various place you can go to get some additional information hopefully answer some questions you may have and lead you down the right path so again my name is Sean Miller I'm a partner with calibre CPA group here in Washington DC and thank you for your time