Читать книгу Auditing Employee Benefit Plans - Josie Hammond - Страница 17

This is potentially the most common pension plan in today’s economy. Commonly referred to by their IRC section, 401(k) plans, also known as CODAs (cash or deferred arrangements), must be part of a profit-sharing or stock bonus plan. However, no employer contribution is required. Basically, a 401(k) arrangement allows employees to defer part of their salaries to the plan. If the contribution election is made, the employee may defer income tax on the amount until the monies are distributed in future years. The employer may make a matching contribution that goes only to those employees who are deferring, a contribution that is shared by all eligible employees, or a combination of both.

These plans are subject to more restrictions than profit-sharing or stock bonus plans that are funded solely by employer contributions.

As with all defined contribution plans, the employee bears the investment risk. In contrast, the plan sponsor or employer has a predictable benefit cost as defined by the plan design.

There are five types of contributions that can be made to a 401(k) plan, although only elective contributions are actually required. The five types are as follows:

 Elective pretax contributions. Employees elect to have a portion of their compensation contributed and tax-deferred under the CODA. These contributions must be fully vested and there are restrictions on withdrawals. These are subject to a special discrimination test referred to as the average deferral percentage (ADP) test.

 Voluntary after-tax contributions. These are contributions that an employee can make via payroll deductions. The contribution is subject to income tax but not the interest accrued within the plan until distributed. They must be fully vested and can be withdrawn, if the plan permits. They are subject to a similar nondiscrimination test as pretax contributions, a test referred to as the average contribution percentage (ACP) test. When withdrawn from the plan, the participant pays tax only on the earnings on these contributions.

 Matching contributions. These are additional amounts based on a formula that the employer may choose for such contributions. They may be subject to deferred vesting and some restrictions on withdrawal.

 Nonelective contributions. Employers may decide to make this contribution irrespective of any employee election or contribution. They are generally allocated based on employees’ salaries; but the allocation formula may take into account age, years of service, Social Security, or other nondiscriminatory factors. They may be subject to deferred vesting and the same restrictions on withdrawal as matching contributions.

 Roth 401(k) contributions. Salary is contributed on an after-tax basis and neither the participant contributions nor the related earnings will be taxable upon distribution, as long as certain tax rules are satisfied. For plan operations, a Roth 401(k) contribution is treated the same as an employee elective pretax contribution, except that some kind of a separate accounting or tracking is required to recognize the distinct tax status of future distributions. Roth contributions are subject to the ADP test, just like employee elective pretax contributions. These vary from regular after-tax contributions because upon withdrawal, both the contribution and any earnings escape taxation, and because they are subject to the ADP test and not the ACP test, as would be the case with other after-tax employee contributions.

These contribution types may have different names with a particular plan document. They may be referred to as discretionary, elective, nonelective, profit sharing, safe harbor, and so on. It is important that the auditor be able to distinguish the type of contribution, whether required or discretionary, and how each is to be accounted for under the plan.