Accrual Based Accounting - Is Your Retirement Plan Benefiting from it?

Have you ever reviewed the contributions listed on your retirement plan’s Form 5500 and wondered why the deductions you’re claiming on your corporate tax return never match? Have you ever discovered that you’ve been accidentally uploading your Roth deferrals from payroll into the pre-tax source and your service provider never caught it?

These are two common concerns of Employers whose retirement plan service providers are using Accrual Based Accounting.jpgcash-basis accounting to perform their annual filing work. Cash basis accounting is simple: Step 1) Print out the bank’s summary of the account activity for the year, Step 2) Write those numbers down on the Form 5500, Step 3) Provide the filing to the Plan Sponsor to review and approve. What happens If the contributions going into the plan are wrong? Well, the Plan Sponsor must have messed something up. What if these errors are discovered under plan audit and affect a Form 5500 from three years ago? The Plan Sponsor will have to open the books going back those three years and not only amend those returns but convert the books to accrual in the process. Got more than a dozen employees? If so, you’ll likely discover other errors that require correction. Also, now you’re under Audit CAP so the penalties for correction are as expensive as they’ll ever be and they’re three years old and have been either compounding interest this whole time or accounts have been distributed incorrectly. Do you think your current service provider is going to pick up the tab or write any of this extra work off for not catching the mistake before the IRS did? Do they have an Enrolled Retirement Plan Agent (ERPA) on staff who is familiar with negotiating penalties with the IRS? Benefit Resources has three.

I get it. You have options when it comes to your retirement plan service provider; one charges almost half of the other so it’s a no-brainer, right? Wrong. Improper plan administration, including accounting, can result in errors being allowed to fester for years just waiting to be uncovered by the IRS or, maybe worse, a studious ex-employee who decides to bring a lawsuit. Besides, since there’s barely any work involved in cash-basis accounting, that means the average administrator can be expected to maintain a caseload of 150 plans or more. How well do you think they know yours?

There are meaningful benefits to accrual based accounting, which shouldn’t require fear of retribution or penalties to appreciate!

Take Some Credit for your Employer Contribution!

You, Mr. or Ms. Plan Sponsor, are providing a valuable benefit to your employees so you deserve some credit! Sure, each participant should be receiving a regular statement in the mail from the plan trust custodian but does that tell the whole story? Instead of emphasizing the period end balance, wouldn’t it be nice if you could include an accrual-basis annual plan statement to everyone that explicitly states the benefit they earned from you this year? Benefit Resources can do this free of charge if you’d like.

Meaningful Transactional Errors Have Nowhere to Hide!retirement plan solutions, retirement solutions, retirement plan help

What’s the point of taking the bank-reported sum total of all the contributions to your retirement plan and reporting it on the Form 5500 if one or two payrolls were uploaded incorrectly or, worse, not at all? How would you know if a Roth contribution went to pre-tax or Jackson Perry received Perry Jackson’s deferral? Do you think Perry would mind? Accrual-basis accounting is preferred by most CFOs and corporate accountants so it makes sense to apply it to your retirement plan as well. Cash-basis accounting means no confirmation of receivables and no confirmation of receivables means no real ability to track contributions on a participant level. This is how errors like the ones described above go unnoticed and, if they’re not noticed now, when do they get caught (and by whom)? Benefit Resources regularly identifies and corrects for transactional errors like these; most of the time for no added fee (missed deposits being the usual exception). Don’t worry, you’re not the only one. It is so common, in fact, that a perfect administration year is cause for celebration around here!

Improved Reporting Accuracy!

Once receivables are properly included in your reporting you’ll actually have accurate financial reporting for the year, you’ll have more accurate participant counts listed on the Form 5500, and the contributions listed on the Form 5500 will finally tie to your W3 and your corporate Form 1120! Wouldn’t that be nice?! It makes you wonder why a retirement plan service provider wouldn’t care to make that a priority like Benefit Resources does, but many don’t. On second thought, maybe the reason isn’t so difficult to determine.

Now that you’re convinced that accrual-basis trust accounting is the way to go, do you know if your plan is using it? Spoiler alert: If you’re using a bundled provider through a mutual-fund conglomerate or payroll company, you’re not. If your TPA has never contacted you about source deposit issues or missed payrolls, you’re probably not. If your Form 5500 employer contributions for a given year never tie to your Form 1120 deductions for that same year, you’re not. So now you have to ask yourself, “What’s it worth to have peace-of-mind when it comes to my retirement plan? Am I interested in the myriad benefits of accrual-basis plan reporting? Would by service provider come up to bat for me if the plan got audited or an irate participant threatened me with a lawsuit? Do they even know who I am?!”

Maybe it’s worth at least figuring out how much a TPA firm that uses accrual-basis accounting charges. If only there were a single button I could click to request a free proposal…

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