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9.7 Employer contributions receivable
Publication date: 30 Jun 2022
us Pensions guide
ASC 960-310-25-1 and ASC 960-310-25-2 states that contributions receivable are amounts due as of the date of the financial statements, including legal or contractual obligations and, for a single employer plan, obligations resulting from a formal commitment. Evidence of a formal commitment may include (a) a formal resolution by the sponsor, (b) amounts relating to an established policy, (c) a deduction on the federal tax return, or (d) the employer’s recognition, as of the reporting date, of a contribution payable to the plan. With regard to criteria (d), AAG-EBP 5.52, AAG-EBP 6.58, and AAG-EBP 7.61 note that the existence of accrued costs in the employer’s financial statements does not, by itself, provide sufficient support for recognition of a contribution receivable by the plan.
9.7.1 Contributions receivable in a defined benefit plan
Employer contributions to a defined benefit plan are actuarially determined to ensure compliance with the funding requirements of ERISA. To meet contractual and legal obligations, defined benefit plans must record a contribution equal to the minimum funding targets as outlined in the Pension Protection Act.
In situations when minimum contributions cannot be made, a funding waiver for a business hardship can be sought. If granted, waivers generally permit a plan sponsor to pay the minimum contributions over a five-year period. In these instances, the plan should record a receivable for the full required minimum contribution, plus interest, as of the plan's year end. The collectability of the receivable should be evaluated and a reserve recorded, when necessary.
Plan sponsors may make contributions to the plan that exceed the minimum for a variety of reasons, including management of Pension Benefit Guaranty Corporation (PBGC) premiums (which are based in part on the plan’s funding status), excess cash flow available, and tax planning strategies to reduce the plan sponsor’s tax liability by increasing the contribution to the benefit plan. Because plan sponsors have until their tax return filing deadline to make contributions, these additional contributions are frequently made after the plan year end.
To determine if an employer contribution receivable should be recorded for contributions made subsequent to year end, the factors described as evidence of a formal commitment in PEB 9.7 should be considered. Contributions, as indicated on Schedule SB (or MB) of the plan's Form 5500, are often the clearest indication of a “formal commitment” in the absence of a formal resolution or written policy on contributions. Plan sponsors are encouraged to establish a formal policy regarding recognition of contributions.
9.7.2 Contributions receivable in a defined contribution plans
Employer contributions to a defined contribution plan are typically made as matching contributions based on a stipulated percentage of the employee contributions to the plan. Defined contribution plans that provide for employer contributions determined by an outside event (typically a profit-sharing plan when the contribution is tied to the sponsor’s earnings) should report contributions on the accrual basis. For example, although the profit-sharing contribution will not be made until after the plan’s year end, if the contribution is determined based on a factor (e.g., percentage of profits, percentage of salary) relating to the employer’s year end which falls on or before the plan’s year end, a contribution receivable should be recorded in the plan’s financial statements.
Unallocated forfeitures, to the extent realized as an offset against contributions receivable, should be netted against the accrual, and disclosed in the notes.
Example PEB 9-1 discusses the timing of recognizing a contribution receivable for amounts approved after the plan’s fiscal year end.
EXAMPLE PEB 9-1
Timing of recognizing a contribution receivable for amounts approved after the plan’s fiscal year-end
Timing of recognizing a contribution receivable for amounts approved after the plan’s fiscal year-end
In April 20X1, the Board of Directors of PEB Corporation established the PEB Corporation Profit Sharing Plan (the "Plan"), a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Under the provisions of the Plan, PEB Corporation's Board of Directors may authorize PEB Corporation to make a profit-sharing contribution to the Plan for any plan year. In February 20X2, the Compensation Committee of PEB Corporation's Board of Directors authorized PEB Corporation to make a contribution to the Plan for the 20X1 plan year in an amount representing three percent (3%) of the aggregate compensation of the covered employees (as defined in the Plan) for the 20X1 plan year.
PEB Corporation plans to recognize a federal income tax deduction for the contribution for the tax year ended December 31, 20X1. An accrual is reflected in PEB Corporation’s consolidated financial statements as of December 31, 20X1 for its estimated profit sharing contribution to the Plan.
Plan participants terminated in 20X2 prior to the Board approval of the contribution would still be entitled to the 20X1 profit sharing contribution.
Should the Plan recognize a contribution receivable as of December 31, 20X1 for the contribution approved by the Board of Directors in February 20X2?
Analysis
Generally, yes, although a number a factors need to be considered to make such a determination.
The plan contribution approved in February 20X2 would be analyzed in connection with the factors noted in ASC 962-310-25-1. A contribution receivable should be recorded if there is a formal commitment as of the end of the 20X1 plan year. PEB would consider the following:
(a) Resolution by the employer's governing body approving a specified contribution - The Board of Directors approved a profit sharing contribution allocable to the 20X1 plan year in February 20X2. The timing of the approval was after the plan year end, but prior to the issuance of the financial statements of both the plan sponsor and the Plan.
(b) Consistent pattern of making payments after the plan's year end pursuant to an established contribution policy that attributes such subsequent payments to the preceding plan year - As 20X1 was the Plan's first year, it did not yet have a consistent pattern of making payments after the Plan's year-end. A policy had not yet been established. However, the metric for calculating the plan contribution was based upon a percentage of the plan participants’ 20X1 salary. Additionally, as stipulated in the facts, had a plan participant terminated in 20X2 prior to the Board approval, the participant would still be entitled to the 20X1 profit sharing contribution.
(c) Deduction of a contribution for federal tax purposes for periods ending on or before the financial statement date - PEB Corporation plans to recognize a federal income tax deduction for the contribution for the tax year ended December 31, 20X1.
(d) Employer's recognition as of the financial statement date of a contribution payable to the plan - PEB Corporation has recorded an accrual as of December 31, 20X1 for its estimated profit sharing contribution to the Plan.
While there is no consistent pattern yet established, consideration of the rest of the criteria indicate that there is a formal commitment and a contribution receivable should be reported in the Plan's December 31, 20X1 financial statements.
The Form 5500 filed for 20X1 Plan Year should be consistent with the Plan's financial statements for the 20X1 Plan Year.
9.7.3 Contributions receivable in a health and welfare plan
Health and welfare plans usually pay claims as they are reported (pay-as-you-go basis). In such instances, employer contributions (net of participant contributions) are made to fund claims as they become due. Contributions are typically recorded in the period in which they are made for pay-as-you-go plans.
There may be other funding arrangements whereby periodic contributions are based on a specified dollar amount or an actuarial calculation. The employer’s funding policy will be an important consideration in determining the proper period in which to record contributions.
Plans should not record contributions receivable solely for the purpose of offsetting an incurred but not reported obligation or the actuarially determined postretirement benefit obligation described in PEB 9.5.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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