When employee benefit plan mergers occur, there are unique accounting and reporting considerations that plan sponsors should be aware of to help ensure a smooth and efficient audit.
A plan merger is an event that usually involves the transfer of plan assets to a new or existing plan. Plan sponsors should consider the following best practices related to the merger:
- Before permitting a transfer related to a merger, the plan sponsor should perform due diligence on items that may impact the plan’s tax-qualified status. The transfer will result in the successor plan assuming benefits earned or accumulated in the prior plan and paying the benefits when they are due. If inaccurate records are transferred, the successor plan may inadvertently assume responsibility for compliance errors in the predecessor plan. Due diligence to be considered is as follows:
- Determine if the plan was audited correctly and if compliance errors were noted.
- Request the merging plan’s auditor’s communication of internal control matters letter from the most recently completed audit to determine if there were any issues identified as material weaknesses, significant deficiencies, or deficiencies that would affect the plan’s ongoing qualified status.
- Gain an understanding of the overall merger/transfer and determine if there are knowledgeable individuals to oversee the process.
- Determine if the plan used external specialists or consultants and if management had controls in place to monitor the transfer at the plan and participant levels.
- Ensure the transfer is properly authorized and the transaction is recorded based on the appropriate date and terms of the merger.
- Under U.S. GAAP, a plan merger should be recorded on the legal merger date, which may differ from the date of the physical asset transfer. To determine the effective date of the plan merger, merger documentation such as plan amendments, board resolutions, or committee minutes must be reviewed. Familiarizing yourself with the relevant documents will help ensure the transfer is accounted for in the appropriate period. If the physical transfer date occurs in a subsequent period, then adjusting your financial statements for the transfer to comply with GAAP will be necessary.
- Identification of the plan transfer can be challenging because it is often a miscellaneous item on the trust report or multiple nonrecurring items on the trust report. Identifying the transfer may involve reviewing reports from multiple sources if there is a change in the service provider during the merger.
- Once the transfer is identified, a required audit step is reconciling assets transferred out of one plan and into a successor plan. The reconciliation must be performed at the plan and individual participant account levels. If participant information is not transferred accurately between trusts, it can result in compliance errors.
- For plans with significant employer contribution receivables, verify that the receivable is recorded in the appropriate plan, particularly if the receivable will be deposited into the surviving plan’s trust account subsequent to the merger date.
- For plans with plan sponsor stock, properly reflect the accurate value of merged assets as of the date of the merger by verifying the amounts transferred and considering the fair value of the stock, in addition to the cost basis.
When employee benefit plans merge, plan sponsors have a significant responsibility to ensure that future audits occur effortlessly. Discussing the above items with your auditors well in advance is recommended to avoid surprises. If you have any questions regarding these tips, please connect with a professional at Forvis Mazars today.