Do You Really Need a Retirement Plan Audit? [Blog Post]
August 31, 2016
The following blog post from SC&H Group’s Employee Benefit Plan Audit practice reviews three questions organizations must consider when determining their need for a retirement plan audit.
Today’s employee benefit plan sponsors are facing growing scrutiny from the Department of Labor (DOL). And with the DOL hiring more auditors, your chances of an Employee Retirement Income Security Act (ERISA) audit are higher than ever.
Further, with increased scrutiny comes a greater potential for penalties. In fact, 17 percent of audit reports reviewed now fail to comply with one of ERISA’s reporting and disclosure requirements—most notably in regards to participant data—according to a recent Employee Benefits Security Administration report.
To avoid significant penalties and ensure compliance, it is essential to understand whom your retirement plan participants are, allowing you to determine when it is time for an audit and how to fulfill all requirements. Therefore, based on ERISA requirements, answer the following three questions to evaluate your need for a retirement plan audit.
Question 1: What exactly constitutes a participant?
ERISA requires all retirement plans with over 100 participants at the beginning of the plan year to file a Form 5500 accompanied by annual audited financial statements.
For the purposes of preparing Form 5500, participants include all of the following:
- Current employees eligible to participate on the first day of the plan year
- Former employees with a balance in the plan on the first day of the plan year
- Beneficiaries of former employees with a balance in the plan on the first day of the plan year
Question 2: Is my participant count at the beginning of this year the same as the count at the end of last year?
Not necessarily, as there are numerous factors that can change the participant count from the end of one year to the beginning of the next, including:
- New hires becoming eligible to participate on the first day of the plan year
- Employees terminated on the last day of the previous plan year who do not have a balance
- Participant balances transferred in on the first day of the plan year or out on the last day of the previous plan year due to plan mergers or business acquisitions
- Other major plan or company changes occurring on the first day of the plan year or last day of the previous plan year
Question 3: What happens if my counts fluctuate over/under 100 participants from year to year?
When filing Form 5500, sponsors need to indicate whether the plan is large or small, since only large plans require audited financial statements.
But what if your plan is consistently near 100 participants? To prevent audit volatility for these plans, the DOL established the 80/120 Rule, which entails:
- Under 80 participants at the beginning of the plan year: file as a small plan, no audit is needed
- Over 120 participants at the beginning of the plan year: file as a large plan, an audit is needed
- 80 to 120 participants at the beginning of the plan year: file under the same status and audit need as the previous year
Have you determined that you will need an audit, or may be getting close to needing one? Be sure to read our “Department of Labor Issues Guidance on Selecting an Employee Benefit Plan Auditor” blog post here.
Contact SC&H Group’s Employee Benefit Plan Audit Services team here to learn more about what to expect, and how to make sure your retirement plan is compliant and audit-ready.