NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The following description of the Williams-Sonoma, Inc. 401(k) Plan (the Plan) provides only general information. Participants
should refer to the Plan document for a more complete description of the Plan provisions.
General
The Plan is a defined contribution plan covering eligible salaried and hourly associates and was created to provide savings opportunities to the associates of Williams-Sonoma,
Inc. (the Company). The Board of Directors of the Company has appointed the Administrative Committee of the Plan to control and manage the operation and administration of the Plan. The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA) and is intended to be qualified under Internal Revenue Code Sections 401(a), 401(k), 401(m), and 4975(e)(7).
Plan Amendments
Effective
October 27, 2017, the Plan was amended to permit eligible associates to make elective deferral contributions on a
pre-tax
or
after-tax
(Roth) basis. The Plan
provides for matching contributions to be made on the basis of the
pre-tax
or
after-tax
(Roth) contributions.
Contributions
The Plan allows participants to defer a portion of their
pre-tax
or
after-tax
income and have such amounts paid into the Plan. Associates who are at least 21 years old may participate as soon as administratively practicable
(approximately 30 days) after their date of hire. The Plan permits eligible employees to make elective deferral contributions up to 75% of their eligible compensation (base salary, hourly wages and overtime) each pay period (7% for
highly-compensated employees) up to the maximum salary deferral contributions allowed under federal income tax rules. Participants who reach age 50 by the end of a calendar year and make the maximum deferrals into the Plan can make additional
catch-up
contributions. Participants are also allowed to rollover to the Plan certain
pre-tax
or
after-tax
distributions from other qualified plans and arrangements. During 2017 and 2016, federal income tax rules limited participants maximum annual salary deferral contributions to $18,000, and
catch-up
contributions to $6,000.
The Companys matching contribution is equal to 50% of each participants salary deferral contribution each
pay period, taking into account only those contributions that do not exceed 6% of the participants eligible pay. Each participants matching contribution is earned on a semi-annual basis with respect to eligible salary deferrals for those
employees that are employed with the Company on June 30
th
or December 31
st
of the year in which the deferrals are made. Full-time associate must complete one year of service, and in addition to the
one-year
service requirement,
part-time, casual and seasonal associates must complete 1,000 hours of service during their first year or any calendar year thereafter, prior to receiving company matching contributions. The Company does not match participants
rollover and
catch-up
contributions. The matching contributions are subject to the vesting provisions of the Plan document as described below.
Participant accounts
The Plan maintains
individual accounts for participants. Each participants account includes their contributions and withdrawals, the Companys matching contributions and an allocation of Plan earnings and losses, which are based upon participant earnings or
account balances, as defined in the Plan document. Participants can transfer their contributions freely between funds at any time and still qualify for the Companys matching contribution.
Investments
Participants direct the
investment of their contributions into various investment options offered by the Plan. Company matching contributions are invested in the same funds as the participants elective deferral contributions. The investment options available to
participants as of December 31, 2017 were as follows:
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Schwab S&P 500 Index Fund a large cap equity fund invested in stocks of the 500 large U.S. companies whose results are included in the
S&P 500 average.
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|
Dodge & Cox Stock Fund a large cap value fund invested in stocks of large, mature U.S. companies.
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|
T. Rowe Price Institutional Large Cap Growth Fund a large cap value fund invested in stocks of large cap U.S. growth companies.
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Hartford International Opportunities HLS Class Fund a foreign stock fund invested primarily in stocks of large,
non-U.S.
international companies. This investment option is new as of 2017.
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4
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Metropolitan West Total Return Bond Fund a bond fund invested primarily in investment grade fixed income securities.
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|
Williams-Sonoma, Inc. Stock Fund consists of Williams-Sonoma, Inc. common stock.
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|
Schwab Managed Retirement Trust Funds these collective common trust funds are invested in a diversified portfolio of assets such as stocks,
bonds and cash equivalents, and asset allocations are adjusted over time to gradually become more conservative as the participant approaches retirement age. These funds are designated by target retirement year, beginning in 2015 and through 2060, in
five year increments. The funds are designed to provide a single investment solution that is adjusted over time to meet participants changing risks and return objectives as they near retirement.
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Schwab Managed Retirement Trust Income Fund a collective common trust fund that is diversified among stocks, bonds and cash equivalents. The
fund follows a conservative asset allocation strategy that does not change over time.
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Rothschild U.S.
Small/Mid-Cap
Core Fund a collective investment trust invested primarily in equity
securities of small and medium capitalization companies. This investment option is new as of 2017.
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|
Galliard Retirement Income Fund a collective common trust fund invested in guaranteed investment contracts, bank investment contracts, and
security-backed contracts.
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|
BlackRock U.S. Debt Index Fund a collective common trust fund invested primarily in U.S. investment grade debt securities, such as U.S. Treasury
and federal agency bonds, corporate bonds, residential and commercial mortgage-backed securities and asset-backed securities.
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Schwab Personal Choice Retirement Account a self-directed brokerage account invested in interest-bearing cash, common stock, mutual funds,
exchange-traded funds, and unit investment trusts not otherwise offered as investment options under the Plan. This investment option is new as of 2017.
|
Loans receivable from participants
Participants who are employed full-time or part-time by the Company are allowed to borrow from their individual account up to 50% of their vested account balance, from a minimum loan of $1,000 up to a maximum loan of $50,000 (reduced in the case of
participants with loans outstanding in the previous year). A participant may have only one loan from the Plan outstanding at any given time. The loans receivable are secured by the vested balance in the participants account and bear interest
at a fixed rate equal to 1% plus the prime lending rate as published by the Wall Street Journal at the beginning of the calendar month in which the loan is initiated. Loans receivable are stated at their unpaid principal balance. Principal and
interest are required to be repaid ratably through regular payroll deductions for up to five years, unless the loan is to acquire a participants principal residence, in which case the maximum term of the loan is fifteen years. If a participant
leaves the Company, any unpaid loans receivable must be paid in full on the participants last day of employment. If the participant does not repay the loan as required, the outstanding balance of the loan is treated as a taxable distribution
from the Plan. As of December 31, 2017, participant loans have maturities through 2032 at interest rates ranging from 4.25% to 9.00%.
Vesting
Participants are immediately 100% vested in their elective deferral contributions, rollover contributions,
catch-up
contributions and any earnings attributable thereto. For the first five years of the participants employment, all matching contributions and any earnings attributable thereto vest at the
rate of 20% per year of service, measuring service from the participants hire date. Thereafter, all matching contributions and any earnings attributable thereto vest immediately. In addition, Company matching contributions become 100% vested
upon a participants death, attainment of age 65 or total and permanent disability, in each case while still employed with the Company.
Forfeitures
When a participant terminates employment prior to full vesting and takes a full distribution of the
vested portion, any unvested Company matching contributions and earnings attributable thereto are immediately forfeited (subject to restoration if the participant returns to employment before incurring a five-year break in service). When a
participant terminates employment prior to full vesting and defers distribution from the Plan, the unvested portion of the Company matching contributions and earnings attributable thereto remain in the Plan (except if the participants vested
balance is $5,000 or less following separation, at which time all amounts are immediately distributed) until the participant reaches a five-year break in service, at which time the unvested contributions and any attributable earnings thereto are
forfeited. These forfeited amounts may be used to reduce future Company matching contributions, pay the Plans administrative expenses, or fund the restoration of forfeited amounts. At December 31, 2017 and 2016, forfeited unvested
accounts totaled $190,136 and $193,779, respectively. During 2017, employer contributions were reduced by $189,509 and administrative expenses of $179,314 were paid from forfeited unvested accounts. During 2016, employer contributions were reduced
by $715,813 and administrative expenses of $144,895 were paid from forfeited unvested accounts.
5
Payment of benefits
Benefits are payable upon
termination of employment, hardship, death, disability, retirement or attainment of at least age 59
1
/
2
. A participant is not required to take the distributions until after the participant both separates from the Company and attains age 70
1
/
2
, except if the participants vested account balance is $5,000 or less following separation, in which case the Plan
will issue the participant a full distribution. Distribution of a participants benefits may be made in cash and are recorded when paid.
Plan termination
The Company has no intention at this time to terminate the Plan, but retains the authority to amend
or terminate the Plan at any time for any reason. In the event of Plan termination, participants accounts become fully vested. Net assets of the Plan are applied for the exclusive benefit of the participants.
Plan administrative and investment expenses
Certain administrative expenses are paid by the Plan, as permitted by the Plan Document. All other administrative expenses are paid by the Company.
2.
|
SUMMARY OF ACCOUNTING POLICIES
|
Basis of accounting
The financial statements of the Plan are prepared on the accrual basis of accounting, and in
conformity with accounting principles generally accepted in the United States of America.
Use of estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions to and deductions from net assets available for benefits during the reporting period. Actual results could differ from
those estimates.
Risks and
uncertainties
The Plan invests in various securities including Williams-Sonoma, Inc. common stock, mutual funds and collective common trust funds. Investment securities, in general, are exposed to various risks, such as interest rate,
credit and overall market volatility. As a result, changes in the fair market values of investment securities have occurred in the past and may occur in the near term. Such changes have materially affected and could materially affect the amounts
reported in the financial statements. At December 31, 2017 and 2016, investments in the Companys common stock was $56,597,762 and $56,226,416, respectively. This investment represents 17.53% and 20.30% of total investments at
December 31, 2017 and 2016, respectively. A significant decline in the market value of the Companys common stock would significantly affect the net assets available for benefits.
Purchases and sales
Purchases and sales of securities are recorded on a trade-date basis.
Cash
Cash represents amounts
temporarily held due to the timing of investment transactions occurring near
year-end.
Investments
The Plans investments are stated at fair value. The fair value of investments in the
Williams-Sonoma, Inc. Stock Fund and mutual funds is based on publicly quoted market prices. The fair value of investments in collective common trust funds is based on the quoted net asset value of shares held by the Plan. The fair value of
investments in the self-directed brokerage accounts is based on the underlying investments which include interest-bearing cash, common stock, mutual funds, exchange-traded funds and unit investment trusts.
Management fees and operating expenses charged to the Plan
for investments are deducted from income earned on a daily basis and are reflected as a reduction of the investment value for such investments.
There are no redemption restrictions for the Plans investments with the exception of the Galliard Retirement Income Fund, which
requires advanced written notice of one business day for redemptions executed daily throughout the year.
Benefits payable
As of December 31, 2017 and 2016, the following amounts were due to participants who had
withdrawn from participation in the Plan:
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|
|
|
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|
2017
|
|
|
2016
|
|
Deferred benefits payable
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|
$
|
98,746,051
|
|
|
$
|
85,852,157
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|
Benefits payable
|
|
|
177,422
|
|
|
|
335,870
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|
|
|
|
|
|
|
|
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|
Total
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|
$
|
98,923,473
|
|
|
$
|
86,188,027
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|
|
|
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|
|
|
|
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|
Deferred benefits
payable
represent vested account balances greater than $5,000 payable to all terminated Plan participants who have elected to defer distribution of their account balances. Benefits payable represent vested account balances of
$5,000 or less which will be paid to participants in the coming year. Benefit payments to participants are recorded upon distribution.
Interest
Interest income is recorded on the accrual basis.
6
Dividends
Dividends represent amounts paid on shares held in the
Williams-Sonoma, Inc. Stock Fund which is determined based on shares held as of the record date and recorded on the
ex-dividend
date. Participants may elect to receive a payout or have their dividends
reinvested into the fund.
3.
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FAIR VALUE MEASUREMENTS
|
The Plan accounts for the fair value of its assets and liabilities using the fair value hierarchy established by the Financial Accounting
Standards Board Accounting Standard Codification 820,
Fair
Value Measurement
, which defines three levels of inputs that may be used to measure fair value, as follows:
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Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;
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Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or
liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability;
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Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the underlying asset or liability
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The Plan has classified the inputs used to measure the fair values of the Williams-Sonoma, Inc. Stock Fund, Schwab Personal Choice
Retirement Account and mutual funds as Level 1. The Williams-Sonoma, Inc. Stock Fund is valued using the daily closing price of Williams-Sonoma, Inc. common stock as reported on the New York Stock Exchange. The Schwab Personal Choice Retirement
Account is a self-directed brokerage account comprised of interest-bearing cash, common stock, mutual funds, exchange-traded funds and unit investment trusts, all of which are valued at the closing price reported in the active market in which the
securities are traded. Mutual funds are valued at the daily closing price as reported by the fund, which represents the net asset value of shares held by the Plan. These funds are required to publish their daily net asset value and to transact
at that price, and are deemed to be actively traded.
Collective common trust funds are valued using the net asset value provided by the trustee as a practical expedient, and are therefore not classified within the fair value hierarchy. The net asset value
is based on the value of the underlying assets held by the fund, less its liabilities. This practical expedient is not used when it is deemed probable that the fund will sell the investment for an amount different than the reported net asset value.
The following table is presented by level within
the fair value hierarchy and provides a summary of the Plans investments measured at fair value on a recurring basis as of December 31, 2017 and 2016. Significant transfers between levels within the fair value hierarchy are recognized as
they occur. During 2017 and 2016, there were no transfers between Level 1, 2 or 3 categories.
Investments measured at fair value as of December 31, 2017 and December 31, 2016 were:
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Pricing
Category
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|
2017
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|
|
2016
|
|
Mutual funds
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|
Level 1
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|
$
|
140,869,318
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|
|
$
|
131,449,788
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|
Williams-Sonoma, Inc. Stock Fund
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|
|
Level 1
|
|
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|
56,597,762
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|
|
|
56,226,416
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Schwab Personal Choice Retirement Account
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|
Level 1
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|
793,344
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|
-
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Total investments classified within fair value hierarchy
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198,260,424
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187,676,204
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Investments measured at net asset
value
1
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124,691,173
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89,358,094
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Total investments measured at fair value
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$
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322,951,597
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$
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277,034,298
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1
|
These investments are measured at fair value using net asset value (or its equivalent) as a practical expedient, and are therefore not classified
within the fair value hierarchy. They are included in the table above to provide a reconciliation of total investments to the Statement of Net Assets Available for Benefits.
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7
4.
|
RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
|
The following is a reconciliation of employer and employee contributions receivable balances per the financial statements at
December 31, 2017 and 2016 to the Form 5500:
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|
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2017
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|
|
2016
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|
Employee contributions receivable per the financial statements
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|
$
|
1,857,465
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|
|
$
|
1,660,807
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Employee contributions earned; received in subsequent year
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|
(1,291,680
|
)
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|
|
(1,126,059
|
)
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|
|
|
|
|
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Employee contributions receivable per Form 5500
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|
$
|
565,785
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|
|
$
|
534,748
|
|
|
|
|
|
|
|
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|
The following is a reconciliation of employer and employee contributions per the financial statements for 2017 and 2016 to the Form 5500:
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|
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|
|
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2017
|
|
|
2016
|
|
Employee contributions per the financial statements
|
|
$
|
25,479,630
|
|
|
$
|
24,225,693
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|
Employee contributions earned; received in subsequent year
|
|
|
(165,620
|
)
|
|
|
(243,329
|
)
|
|
|
|
|
|
|
|
|
|
Employee contributions per Form 5500
|
|
$
|
25,314,010
|
|
|
$
|
23,982,364
|
|
|
|
|
|
|
|
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|
The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 2017 and 2016 to the Form 5500:
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|
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2017
|
|
|
2016
|
|
Net assets available for benefits per the financial statements
|
|
$
|
334,712,677
|
|
|
$
|
287,970,718
|
|
Contributions earned; received in subsequent year
|
|
|
(1,291,680
|
)
|
|
|
(1,126,059
|
)
|
Deemed distribution
|
|
|
(2,150
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net assets available for benefits per Form 5500
|
|
$
|
333,418,847
|
|
|
$
|
286,844,659
|
|
|
|
|
|
|
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8
5.
|
EXEMPT
PARTY-IN-INTEREST
TRANSACTIONS
|
The Charles Schwab Trust Company is the trustee of the Plan,
and Schwab Retirement Plan Services, Inc. is the administrator of the Plan. All investments managed by both companies qualify as exempt
party-in-interest
transactions. Total trustee and administrative fees charged by the Charles Schwab Trust Company and Schwab Retirement Plan Services, Inc. to the Company for 2017 and 2016 were $391,050 and $248,545, respectively.
The Company is also a
party-in-interest
to the Plan under the definition provided in Section 3(14) of ERISA. Therefore, the Companys common stock transactions qualify as
party-in-interest
transactions. At December 31, 2017 and 2016, the fair value of the Williams-Sonoma, Inc. Stock Fund (the sponsoring employer) was $56,597,762 and $56,226,416, respectively, and the Plan
recorded dividend income from the Williams-Sonoma, Inc. Stock Fund of $1,606,782 and $1,676,814 in 2017 and 2016, respectively.
In addition, the Plan issues loans receivable from participants that are secured by the vested balances in the participants
accounts. These transactions qualify as exempt
party-in-interest
transactions.
In 2017, the Internal Revenue Service (IRS) issued a determination letter stating that the Plan, as amended, was qualified and
the trust established thereunder was
tax-exempt
under the applicable sections of the Internal Revenue Code (the Code). The Plan is required to operate in conformity with the Code to maintain its
qualification. The Administrative Committee believes the Plan is operating in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended, is qualified and the related trust was
tax-exempt
as of December 31, 2017. Therefore, a provision for income taxes has not been included in the Plans financial statements.
9