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From McKonly and Asbury
Are you unsure if your company’s retirement plan requires an audit? According to Internal Revenue Service (IRS) rules, a retirement plan must be audited if it meets certain requirements as laid out by the Employee Retirement Income Security Act of 1974 (ERISA), the federal law which establishes standards for retirement plans in the private industry and helps protect the interests of plan participants and beneficiaries. Although some plans are exempt from ERISA (e.g., governmental plans and church plans), a majority of plans are subject to its reporting requirements, including:
- Defined benefit plans
- Defined contribution plans (e.g., profit sharing plans, 401(k) plans, employee stock ownership plans, and 403(b) plans)
- Welfare benefit plans (insured or otherwise) providing health insurance, group life insurance, long-term disability income, severance pay, vacation benefits and other benefits
- Health Reimbursements Accounts
- Flexible Spending Accounts
The penalties for late filing of a properly prepared Form 5500 are significant: IRS penalties are $25 per day, up to a maximum of $15,000, and Department of Labor (DOL) penalties can run up to $1,100 per day, with no maximum. To avoid these penalties, you need to know if your plan requires an audit.
Generally speaking, only when your participant count exceeds 100 will you be required to conduct a benefit plan audit. However, there is one exception to this general rule. Under the “80-120 rule,” as it is commonly known, plans are allowed to file Form 5500s as “small” plans, and do not require an audit, as long as their plan does not exceed 120 eligible participants on the first day of the plan year. Once the plan has exceeded 120 eligible participants at the beginning of a plan year, the plan is considered to be a “large” plan and must have annual audits completed in succeeding years. If the plan would ever fall below 100 eligible participants at the beginning of a following plan year, the plan could then again file as a small plan and no audit would be required.
It is important to note that a company can easily have 120 or more eligible participants, but have less than 120 current employees, so the terminology of the 80-120 rule is key. Eligible participants include all employees who are eligible to contribute to the plan, not just employees that actually contribute or have account balances. Eligibility requirements vary from plan-to-plan and plan administrators should be knowledgeable of their plan’s definition of eligibility, constantly monitoring the number of “eligible” participants to ensure they do not require annual audits.
As mentioned above, retirement plans that are filed as “large” plans on Form 5500 must be audited by an external and independent accounting firm. These audits ensure that you are operating your retirement plan in accordance with DOL and IRS requirements. While you, as the plan owners, will always have fiduciary duty over your plan no matter its size, an external audit can provide that extra level of assurance that you are acting in your participants’ best interests.
For plans that do require annual audits, audited financial statements are required to be submitted with the Form 5500, Annual Return of Employee Benefit Plans, on the last day of the seventh month after the plan year end. There is an optional extension of 2 ½ months.
If your company is approaching the 120-participant threshold, it’s important to become familiar with the plan audit process. Financial statement audits of retirement plans are heavily compliance-driven. While the external accounting firm will audit the financial statements and disclosures, most of their time will be spent testing compliance. This includes:
- Participant eligibility
- Timing of contributions to the plan
- Plan compensation
- Disclosure of prohibited transactions
- Other compliance matters applicable to the plan
To prepare for your first audit, make sure you are compliant with your plan document and with DOL and IRS rules. In addition, begin to gather the myriad of documents that the auditor will request, including the plan document and amendments, participant data (census, contribution detail, distribution detail, loan detail, etc.), investment information details, payroll records, minutes of meetings related to the plan, nondiscrimination testing, and identification of any communications from the DOL. Finally, consider partnering with a fiduciary to administer your retirement plan. A fiduciary will help you comply with regulatory requirements and minimize the risk of future audits revealing problems with your plan. This will make your annual audits even easier!
If you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can learn more about our Employee Benefit Plan services by visiting our website and don’t hesitate to contact Dan Sturm, Partner & Director of ERISA Services at [email protected].