Aduit 401k and MPP combined

[sdix401k]

We are having an audit ( CPA for Form 5500 Schedule H ) on a plan that is governed by two separate documents but the assets are combined in one brokerage account. The accountants are having trouble verify unit information for the 5500 using a percentage based computation on mutual fund units.

They also indicated that they have never seen this before. Assets being combined. I have seen other circumstances where this is the case.

Anyone have any thoughts or suggestions. They now want to do an audit on the entire plan.

Thanks in advance.

[JanetM]

When you put multiple plans in single account(s) it is a master trust and you normally you have additional filing requirements. Is there a monthly allocation to each plan done?

[sdix401k]

One plan conists of bi-weekly 401k deferrals and match and an annual allocaiton to the MPP.

[Kimberly S]

Pre EGTRRA I had some clients with MPP and PSPs that shared a single investment account. We did only annual valuations. We never had any problems with this, BUT they were all small plans that did not require an annual audit.

At this point, why wouldn't they merge the two plans and get rid of the MPP?

[austin3515]

I'm with Kim. There is nothing wrong with two plans in one brokerage account, but this would certainly complicate the audit process. I mean, I guess they would really need to audit ALL of the assets, because each plan gets a pro rata share of the assets (versus earmarking different investments for different plans).

This is alluded to briefly in the instructions to Schedule H. Something to the affect of "for investments from multiple plans commingled in one brokerage account, report each plan's pro-rata share of the investments on Schedule H.

[sdix401k]

I have spoken with the client about merging the plans some years ago. For whatever reason they did not want to do it.

The Cpa isnow talking $15,000 per audit of each plan, so they might be more inclined to do so.

By the way does this seem high for an audit? We are talking 115 active participants full scope audit.

Thanks for all your reposonses, especially on a Sunday morning!!

[austin3515]

So $30,000 total??? That seems a little ridiculous. $15K for both audits I think would be a little high but in the ball-park. I would definitely be inclined to get some more quotes if it was me!

[Guest Dell]

I'm not sure you have a Master Trust, but if you do, it will likely have to be audited in order for the plan audits to be completed without a scope limitation.

Remember, the Plan is the entity that gets audited under ERISA, not the trust. If both of your plans have the participant counts requiring an audit, you need two separate audits completed. If there is a Master Trust, that may also need an audit, separate from the plan audits.

You might also simply be combining investments from your PS plan with investments from your MP plan in the same trust. If you do this, it is required that you be able to track the MP investment activity separately because of the different distribution rules for these plans. If you are not able to do this, that is a problem. The trust does not get audited, but each plan with > 100 participants does.

It sounds like you might have a mess on your hands, which doesn't equate to low audit fees.

[austin3515]

Two plans in one brokerage account is NOT a master trust. I can't site the exact definition of a master-trust, but this is not it.

[Guest Dell]

I agree, you don't end up with a Master Trust by accident. The OP is a bit confusing since he says he has two plan documents but then refers to the auditor's wanting to audit "the entire plan" as if the trust account was one plan.

Sounds like he has two plans and potentially two audits required. If the recordkeeper cannot separate the MP balances from the 401(k) balances, there is a lot of work to be done.

[sdix401k]

The sources are tracked separately and are identified separately for distribution and numerous other reasons. So we know exactly by source what the total account make up is.

Austin mentioned that the instructions indicated you could use a pro-rata amount to break up a brokerage account. I have read the instructions AGAIN. I see some mention to this but it is not spelled out clearly to me. Page 39 column 2

Can anyone point to this specific section.

There are two separate plans governed by two plan documents. I should also mention that each person maintains their own brokerage account which contain the assets of both plans.

The auditor is insistent in not feeling comfortable using a pro rate amount for shares and earnings.

Thanks

[Guest Dell]

The pro-rata allocation just means that each plan reports a pro-rata portion of each investment in the Trust. Since you know the value of each plan's investments separately, you can determine each plan's % of the total trust assets. That % is applied to each category of investment in the trust to give you the amount of the various investment categories for each plan. If it is all in one type of investment (mutual funds) it is not as involved. I don't think you will find something more specific on this than is found in the 5500 instructions.

The auditor will have to confirm and value holdings, and test investment income at the trust level since no investments are earmarked for individual plans. They will have to work with the investments at the trust level and then test the allocations back to the plans, no way around this.

[Bird]

I should also mention that each person maintains their own brokerage account which contain the assets of both plans.

With 100+ participants?! That sounds like an unspeakable horror. Nevertheless, I see no reason for the auditor to have a problem with pro-rating assets and income.

[austin3515]

That's a perfect example of why you should never criticize someone's fees without knowing the whole story.

While I still believe a) the audit requirement is determined independently for each plan, and b) each person's account will need to be "audited" in total because the assets are not "earmarked" for each plan, I have the following amendment to my prior conclusions:

Assuming there are over 100 FBO accounts, $15K is a bargain. Take it and run, and count your blessings.

[sdix401k]

Thanks for all the info. Actually with good software it is not difficult at all. ( All bokergae accounts are at one institution.) (( For Us.))

My main question is it GAAP to use percentages based on sources against total balances.

Thanks in advance.

[austin3515]

I don;t think this is a GAAP question. It's a legal question: "Which plan owns the assets?" I just can't see a way other than pro rata.

[Guest Dell]

The pro-rata issue comes into play in allocating individual trust investments to each plan. If Plan A's contributions and accumulated earnings total 60% of the trust, then Plan A gets allocated 60% of the stocks, 60% of the bonds etc. for reporting purposes at year-end. You still have to determine each plans transcations and earnings for the year before you can do the pro-rata allocation. If everything is in a single mutual fund it is much easier.

I'm not sure what you are basing your pro-rata allocation on, but you cannot just allocate year end totals to each plan pro-rata based on contributions unless all transactions occurred at the same time for each plan. IF Plan A contributes $100,000 throughout the year, and Plan B contributes $100,000 on the last day of the year, you cannot allocate year-end investments and earnings 50/50. It is more complicated than that.

GAAP will not directly reference the pro-rata issue. It will require that investments are owned by the Plan, and that transactions are recorded and properly valued. GAAP does not tell you how to achieve these objectives. You have to use a method that is reasonable.