Monthly Archives: May 2017

When Do You Need a 401K Plan Audit?

auditplanAudited financial statements are required for your 401K Plan when your plan is considered a large plan.  The definition of a large plan is a plan that has 100 or more eligible participants at the beginning of the plan year.  Participants are defined as; active participants in the plan, eligible employees that have not yet participated in the plan, separated or retired participants and beneficiaries.  Large plans must have their 401K Plan audited by a CPA Firm and file Schedule H with their Form 5500.

There are a couple of exceptions to the audit requirement:

  1. 80/120 Rule provides that as long as the number of participants as of the first day of the plan year is between 80 – 120, you can file Form 5500 in the same category (“large plan” or “small plan”) as indicated on the prior year Form 5500 filing and avoid the financial statement audit requirement.
  2. If the plan is a short-year plan and the plan year is 7 months or less, the plan may defer the audit requirement to the following plan year.

Keep in mind that if you had over 100 eligible participants at January 1, 2016 and you don’t meet one of the exceptions above you will be required to have a financial statement audit of your 401K Plan for the year-ended December 31, 2016 which is due July 31, 2017 unless you file for 2 ½  month extension.  Penalties for filing a late 401K Plan audit can be very costly.  If you think you might need a 401K Plan audit, based on the above criteria, you should seek a qualified CPA Firm with experience in 401K Plan audits.

The questions you need to ask to find a qualified CPA Firm to audit your 401K Plan:

  1. Does your firm belong to the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC)?
  2. What is the level of experience with 401K Plans and how many do you audit?
  3. Does your firm have experience working with third party administrators?

Rules and regulations for 401K Plans by the IRS, DOL, ERISA and SSA are constantly changing.  At GKG CPAs we have extensive training and experience auditing 401K Plans, Pension Plans, 403(b) Plans, ESOPs, and Health & Welfare Plans.  If you know you need a 401K audit or are not sure now is the time to call us, we will be happy to help and guide you through the process.

Double Dipping and Business Valuation
in Divorce

calculatorWhen divorcing parties are required to value a business for equitable distribution purposes, there is an additional equitable valuation issue to consider, commonly referred to as “Double Dipping.” This term refers to the potential of the business asset being used to derive both equitable marital property value and as well as used to derive the income stream used for spousal support. Note that child support is not part of any double dipping consideration.

Consider the following: In order to value the business asset, compensation is normalized or reflected as market compensation. The compensation over and above the market compensation determined is treated as part of the owner benefit stream capitalized as part of the goodwill aspect of the business valuation. Thus, the valuation of the business is based on a lower market compensation. If future spousal support payments are based on the non-normalized compensation, this results in the double counting the excess compensation twice! Once for value and once for income stream used to determine spousal support.

A method of resolving this issue in New York State has been to discount the potential 50% allocated to the equitable division of the business value in order to reflect the estimated effect of double dipping. An interesting issue emerges when the business value is increased by excess working capital or the value of other assets incidental to business operations. These incidental assets will increase the business value, but have nothing to do with and should not be considered for double dipping purposes. Any discount afforded to the equitable distribution of the incidental asset of this business needs to be carefully addressed and excluded from the estimated double dipping discount.

For example, if the value of a business is $1,000,000 due to $700,000 of goodwill increased by a $300,000 marketable securities account that is not required for normal working capital needs, the $300,000 should be considered as a 50% allocable portion of the business value and not discounted. Consideration needs to be given to the various components of value in determining double dipping aspects in division of the business pursuant to a valuation for equitable distribution purposes.

Dennis P. Kremer, CPA/ABV/CFF/CGMA/CVA

Buy-Sell Agreements: Why Your Business
Needs a “Prenup”

signing-contract-78525373-e1433511903931Sometimes referred to as a “Business Prenup” a Buy-Sell agreement defines what happens to the ownership of your business if there should be a triggering event involving you or a business partner. A triggering event can be death, disability, divorce or bankruptcy. A triggering event may also occur if one partner decides its time to retire or just wants out of the business!

You may not necessarily want your partner’s spouse or children as business partners no matter how nice they may be. And you certainly don’t want one of your competitors to end up owning a piece of your company. So how do you prevent these things from happening?

A Buy-Sell establishes what will happen in these instances, who interests can be transferred to, and how they will be valued. The agreement will commonly be either a cross-purchase type, where one partner agrees to buy out the other, or a redemption agreement whereby the company buys out the departing partner’s interest. Many times Buy-Sells include a provision to fund the agreement by buying life insurance so that there is adequate cash available to pay the estate of the partner who dies.

A Buy-Sell agreement makes sense for any type of business, whether corporations, LLC’s or partnerships. Even most small businesses should have such an agreement. The cost of drafting a Buy-Sell is small in comparison to the potential problems, disputes and confusion that could ensue if there isn’t one in place when a triggering event occurs.

You’ll need a lawyer who is experienced in such matters to help draft an agreement, but Buy-Sells don’t have to be overly complicated or expensive. Having a general understanding of what you want the agreement to provide for BEFORE you visit with the attorney will help to keep the cost down, so this should be discussed with your business partner(s) ahead of time.

Don Karlewicz, CPA, CGMA

Don Karlewicz is the managing partner of GKG CPAs, a tax, accounting and business advisory firm.

Do Corporations or LLCs Always Protect You?

llc-asset-protectionAs an experienced forensic CPA and fraud examiner, there is very little I have not seen. Often, there may be several versions of the accounting records: one for the business owner; one for the owner’s partners; one for the IRS and one for the spouse. Although I am being somewhat facetious, the reality of business records which stretch credibility whether by design, fraud, diverting of funds or for personal reasons can result in serious consequences.

Companies are sued for many reasons these days: discrimination, sexual harassment, fraudulent financial statements, failure to pay creditors, and more. Businesses incorporate for personal liability protection, among other considerations. A corporation or limited liability company creates a legal protection between the business owner and the acts of the entity if properly respected. That protection can include personal liability against the type of lawsuits previously mentioned. Otherwise the risk of conducting your business can run beyond the level of prudent risk to which you can afford or wish to be exposed. However, this protection is not an automatic entitlement. For instance, failure to pay governmental trust funds such as income taxes withheld from employees and sales taxes withheld from customers will become a personal liability.

In addition there are many rules, regulations and requirements that owners must follow in operating their business. Violating these rules, regulations and requirements can actually void the liability protection against lawsuits and other liabilities. This illustrates the importance of responsible and diligent management of a corporation.

If a special purpose entity (a related corporation commonly owned) is used as a vehicle to commit a fraud, avoid obeying the law or perpetuating a wrongful purpose, the liability protection may be voided by the courts. Smatterings of these acts I have observed over the years through personal forensic analysis consist of:

  • Corporate debt knowingly incurred while the company is insolvent
  • Conducting the business as a sham to cover up some other activity
  • Failure to hold annual shareholder/board meetings or issue minutes in lieu of a meeting
  • Business formalities and recordkeeping are either ignored or treated with no respect.
  • Officer loans are not properly documented
  • Commingling of funds with the owners

Business owners may be putting themselves at personal risk by not operating their business responsibly and thereby jeopardizing the legal protection afforded by corporations and LLCs under normal conditions.

Dennis B. Kremer, CPA/ABV/CFF/CGMA/CVA