Investments in Limited Partnerships and Reporting Such Investments on Form 5500 and 103–12 Entities 

EBP Guide
Disclosure of Certain Significant Risks and Uncertainties
Financial Statement Reporting and Form 5500 Filing Requirements for 103–12 Entities
Pension funds, especially those with large investment portfolios, are more frequently investing in limited partnership private equity funds, which may include hedge funds. These pooled investment funds are lightly regulated and not readily marketable, unlike registered investment funds, commonly known as mutual funds. Auditors should take special care in identifying when a plan invests in a limited partnership because it is not uncommon for such investments to be classified incorrectly (i.e. as a registered investment company or other type of fund) on the schedule of investments provided by the custodian or trustee.
This trend of investing in limited partnerships and the recent scrutiny of accounting and disclosure of limited partnership investments in corporate financial statements have precipitated an issue about what employee benefit plan financial statements should disclose about a plan’s investments in limited partnerships.

EBP Guide

The AICPA Audit and Accounting Guide Employee Benefit Plans (EBP Guide) does not specifically address financial statement or Form 5500 reporting requirements for limited partnerships. Employee benefit plan financial statements report investments at fair value, which include investments in limited partnerships. Such investments are not consolidated or accounted for on the equity method, as they might be in the plan sponsor’s financial statements.

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Disclosure of Certain Significant Risks and Uncertainties

Other required disclosures for limited partnership investments are those applicable under AICPA Statement of Position (SOP) 94–6, Disclosure of Certain Significant Risks and Uncertainties. SOP 94–6 requires disclosures about certain significant estimates and current vulnerability due to certain concentrations.

Consideration should be given to including the following disclosures:

  • Description of the plan's ownership interests in the limited partnerships and a summary of investments owned by the partnership investments and the corresponding risk. A riskier, more aggressive investment would warrant consideration of additional disclosure. 
  • If a related party relationship exists, the names of the other partners in the plan's partnership investments and their relationship to the plan.

  • Methodology in which the partnerships allocate gains, losses, and expenses between the plan and the other partners.

  • Related-party transactions with parties in interest related to the limited partnerships (including investment management fees paid).

  • Additional capital commitment requirements.

Chapter 7 of the Employee Benefit Plans Audit and Accounting Guide addresses auditing procedures for limited partnerships when performing full scope audits. Auditors should take special care in performing limited scope audit procedures on limited partnership investments, as often the certifying entity does not have timely or accurate information regarding the amount and valuation of the plan’s investment in the limited partnership. Although the auditor is not required to audit certain investment information when the limited scope audit exemption is applicable, further investigation and testing are required whenever the auditor becomes aware that such information is incorrect, incomplete, or otherwise unsatisfactory for the purpose of preparing the financial statements.

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Financial Statement Reporting and Form 5500 Filing Requirements for 103–12 Entities

How a plan reports an investment in a limited partnership on Schedule H to the Form 5500 depends on the nature of the underlying assets of the partnership and whether the partnership elects to file directly with the Department of Labor (DOL).

DOL regulation 29 CFR 2520.103–12 provides an alternative method of reporting for plans that invest in an entity, other than a master trust investment account (MTIA), common/collective trust (CCT), or pooled separate account (PSA), whose underlying assets include "plan assets" (within the meaning of DOL regulation 29 CFR 2510.2–101) of two or more plans that are not members of a related group of employee benefit plans. Making this determination can be complicated and may necessitate legal consultation.

Generally a 103–12 entity will operate based on its legal structure (according to its operating agreements) in the form of a financial services product such as a collective trust or a limited partnership. Typically audited financial statements are required by the entity's operating agreement and are prepared in accordance with generally accepted accounting principles (GAAP) in a format following industry standards consistent with the entity’s operations. For example, a 103–12 entity that operates as a limited partnership would prepare financial statements in accordance with GAAP for limited partnerships.

103–12 entities are required to file the following:

  • Form 5500  
  • Schedule A, Insurance Information  
  • Schedule C, Service Provider Information, Part I and II  
  • Schedule D, DFE/Participating Plan Information, Part II  
  • Schedule H, Financial Information (including the Schedule of  Assets (Held at End of Year))  
  • Schedule G, Financial Transaction Schedules  
  • A report of the independent qualified accountant 

Often the format of the financial statement schedules (e.g. Schedule of Assets) for the 103–12 entity prepared in accordance with industry standards are not consistent with format of the schedules as required by Form 5500 instructions. Form 5500 requirements should be considered when preparing additional information schedules to be attached to the 103–12 entity’s financial statements filed with the Form 5500.

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