What you Can Learn from Your EBP’s Financial Statements

With employee benefit plans, Form 5500 is often the main discussion topic but it’s actually the accompanying financial statements that may be the most important.

These statements are key to measuring the plan’s financial health, determining if it’s operating properly, and verifying it’s compliant with all applicable regulations.

The financial statements contain a significant amount of information. Understanding what’s included — and how it relates to the annual trust statement, plan documents, and Form 5500 — can help you stay in compliance, identify potential issues, and make informed decisions about the plan’s investments, fees, and other aspects.

Here’s a breakdown of the financial statement components and the key items to consider when reviewing each component.

Auditors’ report

The report references the audit scope and if an ERISA (Employee Retirement Income Security Act of 1974) Section 103(a)(3)(C) audit (ERISA 103(a)(3)(C) audit) or non-Section 103(a)(3)(C) audit (ERISA audit) is being performed on the plan. If a certification is being provided by a qualified institution, this may allow for an ERISA Section 103(a)(3)(C) audit, and the certification will be referenced in the auditors’ report.

Statement of net assets available for benefits

This includes the balances of the assets in the plan, including investments and receivables, and liabilities in the plan, including payables. The information is derived from the plan’s annual trust statement. When reviewing this schedule, consider the plan’s investment strategy, look for any significant changes in the plan’s assets or liabilities that could impact the plan’s financial health, and verify the assets are sufficient to cover the plan’s liabilities.

The amounts on the statement should be compared to Schedule H of the Form 5500, and if there are any differences between Form 5500 and financial statements, this should be outlined in a reconciling note in the financial statements.

Statement of changes in net assets available for benefits

This includes the balances of the plan additions, including income and contributions, and deductions in the plan, including benefit payments and expenses. The information is derived from the plan’s annual trust statement. When reviewing this statement, consider investment performance, look for any unusual income or expenses, and confirm the plan’s expenses appear reasonable.

The amounts on the statement should be compared to Schedule H of the Form 5500, and if there are any differences between Form 5500 and financial statements, this should be outlined in a reconciling note in the financial statements.

Notes to financial statements

Several pages of the financial statements consist of the following notes:

• Description of plan — Contains plan provisions including eligibility, contributions, participant accounts, benefit payments, vesting, notes receivable from participants (loans), and forfeitures. These provisions are taken from the plan document, adoption agreement, and/or summary plan description so should be evaluated for accuracy based on these documents. When reviewing this note, consider if your plan’s operations are in accordance with the provisions stated in the plan documents.
• Summary of significant accounting policies — Refers to the plan’s accounting policies and how plan activity is measured and recorded. When reviewing this note, consider if the valuation of investments appears reasonable and expenses are properly recorded.
• Certification of investment information — Indicates the investment information covered under the certification provided with the annual trust statement by the qualified institution in an ERISA section 103(a)(3)(C) audit. When reviewing this note, compare it to the certification provided with your plan’s trust statement and also consider if notes receivable from participants (loans) are covered under the certification.
• Fair value measurements — Consists of the leveling for the fair value of investments (level 1, level 2, or level 3) and valuation methodologies. Investments valued at contract value are not disclosed in this note. When reviewing this note, compare the investment classifications and balances to those presented on statement of net assets available for benefits. Also, consider if you plan has any investments valued as level 3 or valued at net asset value as a practical expedient as opposed to fair value that would require additional disclosures.
• Group annuity contract with insurance company — Discloses the terms and conditions of the guaranteed investment contract, if applicable. When reviewing this note, consider if the investment meets the definition of a fully benefit responsive investment contract based on the group annuity contract between the plan and the insurance company.
• Plan termination — Provides considerations if the plan were to terminate. When reviewing this note, consider if there are any events that would result in a plan termination or a partial plan termination (if layoffs or another change occurred during the plan year resulting in the termination of more than 20% of plan participants) and the effect this would have on vesting.
• Plan tax status — References the opinion letter from the IRS related to the prototype plan document. When reviewing this note, consider if the plan is designed and is currently being operated in compliance with the applicable requirements based on this letter and the plan documents.
• Party-in-interest transactions — Mentions the qualified institution that oversees the investments of the plan and may disclose fees information associated with these investment management services. When reviewing this note, confirm there have not been any prohibited transactions between the plan and parties-in-interest that would violate regulations and result in penalties or taxes.
• Reconciliation to Form 5500 — Included if there are any differences between the statement of net assets available for benefits and statement of changes in net assets available for benefits in the financial statements as compared to Schedule H of the Form 5500. It displays the reconciling items between the financial statements and Form 5500. It should be reviewed to confirm total net assets and total income/expense reconcile between the financial statements and Form 5500 and that the reconciling items appear reasonable. Common reconciling items include contribution receivables, excess contributions payable, and deemed loans.

Supplemental schedule(s)

The supplemental schedule(s) are required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA. One or more may be required in your financial statements:

• Schedule of assets (held at end of year) — Contains all investments held at the end of the plan year. The fund names and amounts are obtained from the annual trust statement. This schedule is considered an attachment to the Form 5500 and is referenced in the compliance questions section of Schedule H. When reviewing this schedule, confirm the total assets match those included on the statement of changes in net assets available for benefits and review the listing of investments for accuracy based on the plan’s trust statement and the plan’s investment strategy.
• Schedule of reportable transactions — Lists the transactions or series of transactions exceeding 5% of the current year value of plan assets at the beginning of the plan year in a plan that holds non-participant directed investments. This schedule is considered an attachment to the Form 5500 and is referenced in the compliance questions section of Schedule H. When reviewing this schedule, consider if it looks reasonable based on any significant investment purchases or sales made during the year.
• Schedule of delinquent participant contributions — Required if there are participant contributions and loan repayments that have not been transmitted to the plan within the required timeframe and therefore must be reported as late. The amount of delinquent participant contributions and loan payments reported in this schedule should agree to the amount reported in the compliance questions section of Schedule H in the Form 5500. When reviewing this schedule, it’s important to understand the cause of these late contributions and to verify they are fully corrected by remitting the contributions (if not done so already), remitting lost earnings, and filing a Form 5330 to pay the excise tax.

How we can help

At CLA, we offer powerful tools plan sponsors can use to help improve operations, reduce waste, and tighten controls. In particular, a disclosure checklist can be a useful tool in reading your plan’s financial statements. Your independent auditor or CLA’s employee benefit plan professionals can assist in providing a checklist updated for all current professional standards.