Does Your 401(k) or 403(b) Plan Need an Audit?

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Monitoring your 401(k) or ERISA 403(b) plan can save significant costs if you are able to stay under the participant count requiring an audit.  Retirement plans with generally under 100 participants at the beginning of the plan year are considered “small plans” and are required to file Form 5500-SF.  This return/report is 3 pages, requiring limited financial and compliance information relating to the plan.  Plan sponsors may complete this form on their own or engage a third-party administrator (TPA) to prepare the form and administer the plan activity.  Once your plan goes over the participant count and is considered a “large plan” there are many additional requirements, including preparation of full Form 5500 reporting and audited financial statements.

Generally, plans with more than 100 participants at the beginning of the plan year are considered “large plans” and must engage an independent auditor to prepare audited financial statements that must be attached as part of their Form 5500 filing.  Completing the full Form 5500 and the audited financial statements will increase the internal administrative time needed to administer your plans as well as increase external fees to TPAs and the auditors.

How do you determine whether or not you need a 401(k) or 403(b) plan audit?

In order to determine whether you can file as a “small plan” (no audit requirement) or must file as a “large plan” (with the audit requirement), you have to determine how many plan participants you have at the beginning of your plan year.  As mentioned above, plans with, generally, more than 100 participants (large plans) at the beginning of the plan year must engage an independent auditor.  Following is the “80-120 Rule” for plans whose participant counts hover around 100.  It provides relief from bouncing in and out of the audit requirement, but, even better, it can help plan sponsors stay out of the audit requirement if their participant count stays at or below 120 at the beginning of the year.

80-120 Participant Rule (Large Plan vs. Small Plan)

If the number of participants reported on Line 5 of the Form 5500 is between 80 and 120, and a Form 5500-SF was filed for the prior plan year, you may elect to complete the return/report in the same category (“large plan” or “small plan”) as was filed for the prior return/report. Thus, if a return/report was filed for the 2015 plan year as a “small plan,” either Form 5500-SF or Form 5500 including the Schedule I, and the number entered on Line 5 of the 2015 Form 5500 is 100 to 120, you may elect to complete the 2016 Form 5500 and schedules in accordance with the instructions for a “small plan” (no audit requirement).  Once your participant count on Line 5 is 121 or greater, you must file as a “large plan,” and your participant count on Line 5 must be below 100 before you can file as a “small plan.”

Cost saving strategy: While plan management wants to encourage participation of active employees, it should monitor the accounts of terminated employees to minimize the costs related to these participants.  Thus, plan management should encourage all terminated employees to roll their account balances over to their new employer or into an individual retirement account as part of their employee termination process.  Many plan documents provide that the plan administrator can distribute terminated participants with account balances under $5,000 to an IRA or under $1,000 as a distribution from the plan.  By reducing the number of terminated participants in the plan, the company reduces their plan costs and, for those plans hovering around 100 participants, may keep the plan under the participant count requiring the “large plan” filing and audit requirements. 

Who is a Participant?

Active participants – those individuals currently employed with the plan sponsor who are covered under the plan. It is important to note that for 401(k) and 403(b) plans an active participant includes eligible participants who have not elected to defer into the plan. When working with your TPA to determine the participant count, they may only have those actively deferring into the plan and not those eligible but not deferring; both are included as active participants.

Retired or separated participants – those individuals who are no longer employed by the employer but who are receiving benefits or are entitled to receive benefits under the plan.

Deceased participants – those individuals who are deceased and have one or more beneficiaries receiving or entitled to receive benefits.

The details of these requirements can be found in the instructions to Form 5500 under “What to file and the detailed instructions for Lines 5 and 6.  You should work with your TPA to determine your participant count and review the information with your auditor.  If you are just under the 120 limit, you should work with your TPA to manage terminated accounts to try to stay out of the audit requirement.

Transition Relief Applicable to 403(b) Plans: As 403(b) plans had limited Form 5500 reporting requirements in years prior to 2009, the Department of Labor (DOL) issued Field Assistance Bulletin No. 2009-02 (FAB 2009-02) providing guidance and transition relief on annual reporting requirements for 403(b) contracts issued prior to January 1, 2009.  FAB 2009-02 provides that the plan administrator may exclude from Form 5500 reporting annuity contracts and custodial accounts for participants that meet the following:

  • The contract was issued prior to January 1, 2009
  • The employer ceased to make or have an obligation to make contributions to the contract of a current or former employee before January 1, 2009
  • All rights and benefits under the contract are legally enforceable against the custodian or insurer without involvement by the employer
  • The individual owner of the contract is fully vested in the contract or account

Contracts that meet the above criteria may be excluded from reporting for participant count information as well as excluded from assets on the Form 5500.  The DOL issued FAB 2010-01 in response to numerous questions and for further clarification relating to FAB 2009-02.

5500 Reporting for “Large” 401(k) or 403(b) Plans

As mentioned above, the full Form 5500 and required schedules is significantly more in depth and will require additional preparation time and cost.  Below is a list of some of the information and schedules to be included in your Form 5500 for 2016:

  • Form 5500 – Participant Count Information – Required for all plans
  • Schedule A – Insurance Information
    • Required if any benefits under the plan are provided by an insurance company or similar organization.  This includes investment contracts such as pooled separate accounts and guaranteed investment contracts.
  • Schedule C – Service Provider Information for Large Plans
    • Service providers that received $5,000 or greater are required to be included
    • Information regarding the termination of an accountant or actuary
  • Schedule D – Participating Plan Information
    • Required for plans with collective trusts, pooled separate accounts, master trust investment account or 103-12 IEs
  • Schedule G – May be required to report certain prohibited transactions or defaulted obligations
  • Schedule H – Financial Information for Large Plans
    • In addition to the financial information for the plan and questions regarding transactions made during the year, this schedule includes the requirement to engage an independent qualified public accountant and attach accountant’s report along with other financial schedules
  • Schedule R – Retirement Plan Information
    • Includes information on plan distributions

When is the Form 5500 Due?

Form 5500 is due by the end of the 7th month after the plan year-end with the option of an additional 2 1/2 month extension.  For example, for December 31st plan year-ends, the Form 5500 must be filed by July 31st or October 15th with the Form 5558 (Form 5500 extension).

Please contact us at or 860.561.6831, if you have any questions or if we can be of assistance with you plan needs.


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