Does your employee benefit plan require an audit? The U.S. Department of Labor (“DOL”) generally requires all large plans file audited financial statements with the plan’s tax filing of Form 5500. A large plan is defined as a plan with 100 or more eligible participants at the beginning of the plan year, unless certain exceptions apply.
Who is considered a plan participant?
A plan participant is an employee eligible to participate in an employer’s retirement plan when certain eligibility conditions stated in the plan document are met. A participant is any employee or former employee of an employer who is or may become eligible to receive a benefit from an employee benefit plan.
When is a plan’s initial audit required?
The key to determining if an employee benefit plan requires an audit is determining whether the plan is classified as a large or small plan. A large plan is defined as a plan with 100 or more eligible participants at the beginning of the plan year. In contrast, a small plan is defined as a plan with fewer than 100 eligible participants at the beginning of the plan year.
For small plans, audited financial statements are generally not required. For large plans, an audit may be initially deferred but not eliminated. A large plan may elect to defer the audit for plan years of seven months or less (due to initial year of the plan, merger, or change of plan year). The election does not eliminate the audit requirement; it only defers the audit requirement until the following year.
In the year in which the audit will be required, the audit will cover the full plan year and the short period. Additionally, Form 5500 must still be filed for the short plan year.
The 80–120 Rule
As provided in DOL regulations, a plan that covers between 80 and 120 participants at the beginning of the current plan year may elect to complete the current year return, Form 5500, using the same category (i.e., large or small plan) that was used in the previous year.
A plan that has not filed as a large plan in the year prior to reaching 100 eligible participants has the option to continue filing as a small plan as long as the number of eligible participants does not exceed 120. Once it exceeds 120 eligible participants, it must file as a large plan and is subject to the audit requirement. If a plan has filed as a large plan and drops below 100 eligible participants in the following year it should continue to file as a large plan until the number of eligible participants drops below 80. Once it falls below 80 eligible participants, it can file as a small plan again and then no longer subject to the audit requirement.
The following types of employee benefit plans are subject to audit requirements:
- Defined contribution plans (i.e. 401(k) and 403(b), and ESOP plans)
- Defined benefit pension plans
- Health and welfare plans
The filing deadline for submitting audited financial statements with Form 5500 is the last day of the seventh month after the plan year end with an option to extend for two and a half months.
Goal of an Employee Benefit Plan Audit
An audit of an employee benefit plan fulfills the fiduciary responsibility of the plan sponsor’s compliance requirements. In addition, an audit provides great insight into the plan sponsor’s control environment and internal control processes. Knowledge of weaknesses in the plan’s internal controls can assist plan management in identifying operational errors and potential fraud risks, implementation if new processes and internal controls, which leads to more effective management of the plan.
Becoming familiar with employee benefit plan audit requirements is important for business planning and compliance monitoring purposes. For assistance with your employee benefit plan audit, please contact your L&B professional at (858) 558-9200.