When Does Your Retirement Plan Need an Audit?

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The Employee Retirement Income Security Act of 1974 (ERISA) establishes standards and rules governing employee benefit plans (401(k), 403(b), Pension, other retirement and health and welfare plans), including independent audit requirements.  The audit requirements for these plans can be confusing.  Generally, all large non-governmental and non-church retirement plans are required to be audited by a qualified certified or licensed public accountant on an annual basis.  ERISA also generally requires large funded health and welfare plans (normally indicated by the establishment of a trust to hold plan assets) to be audited on an annual basis.

What is meant by a “large” plan?

A large employee benefit plan generally administers benefits for 100 or more participants, measured as of the beginning of the plan year.  However, a plan with more than 100 participants can be categorized as a “small” plan in certain situations.  Plan management must look to the “80-120 Rule” to determine whether a plan benefiting between 80 and 120 participants is categorized as a large plan for Form 5500 and audit requirements.

Who is a participant?

When determining the participant count in the plan, management must include all 1) actively participating employees, 2) separated (retired, deceased, terminated) employees who still have balances in the plan, and 3) eligible employees who are not actively participating in the plan.

What is the 80-120 Rule?

The 80-120 Rule stipulates that a plan with between 80 and 120 participants may do a look-back analysis to determine whether or not to classify the benefit plan as a large or a small plan in the current year for Form 5500 reporting and audit requirements.  Essentially, if the plan has between 80 and 120 participants, plan management can “look back” to the prior year and file the same way they did in the prior year.  The following illustrates the application of the 80-120 rule:

Number of participants as of the beginning of the plan year

How did the plan file in the prior year?

Large or small plan for current year reporting?

Audit required?

Less than 80 N/A* Small No
80-99 Small Small No
Large Either ** Optional**
100-119 Small Either ** Optional**
Large Large Yes
120 or more N/A* Large Yes

* The look-back analysis is not applicable in these situations.  A plan with less than 80 participants will file as a small plan and a plan with 120 or more participants will file as a large plan.

** In most cases plan management will elect to file as a small plan in this situation to avoid administrative burden of the large plan Form 5500 and audit requirement.  If the plan elects to be treated as a large plan, they must file the full Form 5500, which includes attaching the plan’s financial statements with independent auditors’ report.

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