Proposed Updates to Master Trust Presentation & Disclosure Requirements for Employee Benefit Plans
General practice has been for plan financial statement preparers to refer to the American Institute of CPAs (AICPA) Audit and Accounting Guide Employee Benefit Plans for clarity about how extensive disclosures should be for a master trust’s investments. The Financial Accounting Standards Board (FASB) is seeking to provide more comprehensive U.S. generally accepted accounting principles (GAAP) disclosure and presentation requirements. On July 28, 2016, FASB issued proposed Accounting Standards Update (ASU) Plan Accounting—Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (A Consensus of the Emerging Issues Task Force). The proposal would clarify presentation requirements for a plan’s interest in a master trust and changes in its interest. In addition, the proposal would require more detailed disclosures of the master trust’s investments and the plan’s interest in the investments. The amendments also would eliminate a redundancy relating to 401(h) account disclosures.
The amendments apply to all reporting entities within the scope of Topics 960, 962 or 965 and would be applied retrospectively to all periods presented, beginning in a reporting entity’s fiscal year of adoption. FASB is seeking feedback on the proposal, including whether it should consider other master trust disclosure requirements, such as those required by Topic 815, Derivatives and Hedging, and Topic 820, Fair Value Measurement, as well as all matters of the proposal. Comments are due by September 26, 2016.
A master trust is a trust that holds assets of more than one plan sponsored by a single employer or a group of employers under common control. A regulated financial institution serves as trustee or custodian of the master trust. Each plan has an interest in the net assets of the master trust, which may be held as divided interests, undivided interests or a combination thereof. A plan with a divided interest has specific ownership in individual investments of the trust and all interest, dividends, other income, expenses and any proceeds from the sale or disposition of the investments allocable to that divided interest. A plan has an undivided interest in a master trust when the plan holds a proportionate interest in the net assets of the master trust but has no specific ownership interest in any of the individual investments of the master trust.
The amendments would require all plans to report interest in a master trust as a single line item in the statement of net assets available for benefits and changes in interest as a single line item in the statement of changes in net assets available for benefits. This requirement already is provided under Topic 960, but similar guidance is not provided in Topic 962 or Topic 965.
To add transparency to the amount recorded in the statement of net assets available for benefits, the proposed amendments would require all plans to disclose the master trust’s other asset and liability balances and the dollar amount of the plan’s interest in each of those balances. GAAP does not currently require disclosure of the master trust’s other assets and liabilities, e.g., amounts due to and from brokers for securities sold/purchased, accrued interest and dividends, receivables and payables relating to derivatives and other accrued expenses.
The amendments would require a plan to disclose the fair value of investments held by the master trust by general type of investment, the net appreciation or depreciation in the fair value of investments of the master trust by type—including interest—dividends and realized gains and losses on investments that were both purchased and sold during the period as well as unrealized appreciation/depreciation of investments held at year-end. Plans would describe the basis used to allocate net assets and total investment income and the plan’s percentage interest in the master trust as of the date of each statement of net assets available for benefits presented. Current guidance in Topic 960 and Topic 962 is similar to the proposed amendments, but such guidance is not provided in Topic 965. As proposed, plans with divided interests in a master trust also would be required to disclose the dollar amount of its interest in each general type of investment held by the master trust—consistent with the other disclosures.
The vast majority of benefit plans offered to today’s employees are defined contribution plans that involve participant-directed investments, versus defined benefit plans where investments were typically directed by the sponsor (nonparticipant-directed investments). With this evolution, plans generally have divided interests in master trusts. The updates would require these plans to disclose the dollar amount of their specific interest in each general type of investment.
Investment disclosures, e.g., those required by Topic 815 and Topic 820, relating to 401(h) account assets, are generally provided within the defined benefit pension plan financial statements. Because of this, FASB is proposing to not require health and welfare benefit plans to provide such disclosures. Instead, health and welfare benefit plans would be required to disclose the name of the defined benefit pension plan in which the investment disclosures are provided, allowing participants to access those statements for information about the 401(h) account assets.