Form 5500 - Cash Basis vs. Accrual Basis

Good morning, I hope all is well.  Generally when we file Form 5500 we do so on an Accrual Basis.  I'm taking over two 401(k) plans, where the previous TPA has been filing the Form 5500 on a Cash Basis. 

I assume there is no issue, one way or the other?  Is it better to continue filing them on a Cash Basis, or should we consider switching over to an accrual basis?

Thanks!

Congratulations on gaining new business!  Technically, the Plan Administrator should make the decision and the PA likely will ask for guidance.  Generally, the plan wants to be consistent in its basis for reporting, can make the change.

The plan can change to reporting on an accrual basis which usually is a good idea if the plan needs or soon will need an independent audit.  The auditors have to report on an accrual basis.

Sometimes, full accrual accounting can be challenging particularly when the financial information is not reported to the plan on an accrual basis. 

Keep in mind that there is a third alternative to cash or accrual accounting and that is modified cash accounting.  Under modified cash accounting, typically the assets are reported on a cash basis, but items like contributions made after the close of the plan year or distributions checks were cashed after the closed of the plan year are reported on an accrual basis.

If this is a calendar year plan, you have 11 days to get the filings done.  You may want to consider using cash basis for 2022 if you have to rely on data from the prior service providers, and then make the switch to accrual or modified cash basis for next year's filings.

All guidance I've seen simply requires reporting to be consistent from period to period.  That shouldn’t preclude a (very) occasional change in method with good reason. 

That said, my question as an auditor would be why you want to introduce unnecessary complication?  When I get a new plan audit on the modified cash basis, I am overjoyed to go with that.  Accrual is an added hassle to reporting (and incurred time) that, really, no fiduciary I’ve ever met cares about as long as everything is correct.  (I’m assuming by “cash” you already mean modified cash, which “utilizes the cash basis of accounting while carrying investments at fair value and recording investment income on the accrual basis. All other transactions are recorded on the cash basis.”  True cash without investment valuation changes within a plan is too weird for me to visualize.)  Plans can be audited on the modified cash basis.