Major changes in employee benefit plan reporting

By Shirley Appleby, CPA
Senior Staff, Sturgill & Associates, LLP
Member, Accounting and Auditing Standards Committee

Anyone who receives the Journal of Accountancy on a monthly basis is probably aware that some major changes have recently occurred in employee benefit plan reporting. SOP 99-2, "Accounting for and Reporting of Postretirement Medical Benefit (401(h)) Features of Defined Benefit Pension Plans" was officially released in October, and SOP 99-3, "Accounting for and Reporting of Certain Defined Contribution Plan Investments and Other Disclosure Matters" was released in November. Both have the same effective date, for financial statements for plan years beginning after December 15, 1998 (or stated another way, ending after December 15, 1999). Early adoption is allowed, though not required. Both of these Statements of Position have been adapted to and amend the current AICPA Audit and Accounting Guide, "Audits of Employee Benefit Plans," specifically chapters two through four. It is recommended you obtain the updated version of this Guide from the AICPA if you do not already have it. The appendices have illustrated examples of the financial statement presentations that will be required. If you're like me, you should find them helpful. As they say, "a picture is worth a thousand words."

401(h) account assets

Statement of Position 99-2 affects primarily the accounting and reporting for Defined Benefit Pension Plans and Health and Welfare Plans, those in particular that have established 401(h) accounts. According to the Employee Retirement Income Security Act of 1974 (ERISA), the assets held in a 401(h) account are to be included on the pension plan's annual Form 5500 as a plan asset, even though these amounts are specifically set aside for postretirement medical benefits, not pension benefits, per se. ERISA also requires that Health and Welfare Plans not report the 401(h) account assets as assets of the plan even though they are designated for health benefits. The AICPA has found that this type of presentation in the financial statements is misleading and has, therefore, come out with this new Statement of Position. The AICPA is now recommending that a one line item for the 401(h) account assets be added to the asset section of the Statement of Net Assets Available for Benefits and that an offsetting line item be entered in the liability section of the same financial statement. No details of the changes in net assets for the 401(h) account are to be presented in the financial statements of the pension plan. Footnotes stating that the 401(h) account assets are not available to pay for pension benefits and reconciling the Form 5500 to the financial statements are also required.

Conversely, Health and Welfare plans are to report 401(h) account assets as assets of the plan. They are to report details of changes in the 401(h) account and the benefit obligations related to the 401(h) account in their financial statements. As with the Defined Benefit Pension Plan, a footnote reconciling the financial statements with the Form 5500 will be required.

There are other items that should be noted. Accounting changes adopted to conform to the provision of this statement should be made retroactively by restatement of the financial statements for prior periods. Another interesting feature of this SOP deals with qualified transfers of excess pension plan assets to a 401(h) account. Please refer to the SOP in its entirety for details regarding the rules for this.

Fewer disclosures!

Statement of Position 99-3 is the statement that will probably affect most of us. It eliminates the need for certain financial statement reporting required in the past and initiates some new reporting requirements for Defined Contribution, Health and Welfare, and Pension Plans. Those time consuming, nerve racking disclosures requiring plans to present plan investments by general type for participant directed investments in the Statement of Net Assets Available for Benefits have been eliminated. The requirement to disclose participant directed investment programs and the total number of units and net asset value per unit during the period and at the end of the period by plans that assigned units to participants has also been eliminated. That's the good news. And good news it is!

Non-participant directed investment reporting remains the same, except that a new disclosure, similar to one already required for participant directed investments, has been adopted. The plan is now required to identify non-participant directed investments that represent 5 percent or more of Net Assets Available for Benefits at the beginning of the plan year. It should also be noted that if the previously required "by fund" disclosures are eliminated, the reclassification of comparable amounts in financial statements for earlier periods is required.

More good news

Defined Contribution, Health and Welfare, and Pension Plans are no longer required to disclose benefit responsive contracts by investment fund options.

Space and time prevent me from explaining fully all aspects of these SOPs. My goal is to alert you to the fact that these changes are "out there" and that you should check them out thoroughly if you think they affect you. For auditors just starting their first employee benefit plan audit, a lot of this may be difficult to understand. For definitions of the plan types, and other terms used in this article, please refer to the SOP or the AICPA Accounting and Auditing Guide, "Audits of Employee Benefit Plans."

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