The profound economic implications of the COVID-19 pandemic have cast a shadow over businesses across various sectors. Employee benefit plans, crucial for the well-being of participants, are not exempt from the operational challenges and financial reporting complexities wrought by the pandemic. Plan sponsors, auditors, and other service providers must be prepared to tackle the potential effects of COVID-19 on plans and individual participants, both for the plan year ending December 31, 2019, and beyond.
Accounting and Reporting Concerns for the Year Ended December 31, 2019
For the plan year ending December 31, 2019, employee benefit plans (EBP) face critical accounting and reporting issues stemming from the uncertainties introduced by COVID-19. Some of the primary concerns include:
- Collectability of Outstanding Participant Loans: The ability of participants to make required payments on outstanding loans may be impacted if they face financial constraints due to COVID-19.
- Disclosures on Risks and Uncertainties: FASB Accounting Standards Codification (FASB ASC) 275 mandates disclosures focusing on risks and uncertainties that could significantly affect financial statement amounts in the near term. These disclosures should address operational nature, significant estimates, and current vulnerabilities.
- Subsequent Events Reporting: FASB ASC 855 classifies subsequent events as those occurring after the balance sheet date but before financial statements are issued. For calendar year-end 2019 financial statements, COVID-19 related subsequent events are likely to be non-recognized subsequent events (Type II).
Operational, Accounting, and Reporting Issues for 2020 and Beyond
As we progress into 2020 and beyond, plan sponsors and auditors need to anticipate and address various operational and reporting challenges:
- Increase in Participant Loans: Financial difficulties faced by participants may result in a surge in participant loans. The CARES Act has temporarily increased the loan limit for qualified individuals.
- Hardship Distributions: The CARES Act allows qualified individuals to take a coronavirus-related hardship distribution of up to $100,000 from their retirement plan, subject to IRS safe-harbor rules.
- Suspension of Required Minimum Distributions (RMDs): The CARES Act has temporarily suspended RMDs for 2020 from defined contribution plans.
- Deferral of Minimum Required Contributions for Single-Employer Defined Benefit Plans: Single-employer defined benefit plans can defer 2020 minimum required contributions to January 1, 2021, with accrued interest.
- Impact on Internal Controls: Remote work environments necessitate an evaluation of whether internal controls are operating as designed. Concerns about information and data security are heightened during the transition to remote work.
- Financial Difficulties and Employer Contributions: Plan sponsors facing financial challenges may delay or eliminate employer contributions. Plan documents need careful examination to understand how and if employer contributions can be delayed or eliminated.
- Partial-Plan Terminations: Employer-initiated severance may trigger partial-plan terminations, especially for plans not 100% vested in employer contributions.
- Audit Challenges: The traditional audit may face challenges due to business closures and remote work. Remote auditing procedures need to be designed to address planning procedures, risk assessments, internal controls, and financial statement reporting.
- Regulatory Relief: The SEC has granted a 45-day extension for filing certain disclosure reports for public registrants. The Department of Labor and the IRS are expected to provide Form 5500 filing relief and other regulatory relief.
By collaborating closely, plan sponsors and auditors can navigate these challenges and ensure that employee benefit plans remain compliant with regulations during these challenging times. It is imperative to stay informed and seek advice from professionals to ensure adherence to the latest regulatory changes. This article provides information for general purposes only and should not be considered as tax advice. Consultation with a tax advisor is recommended for specific situations and tailored guidance.