Year-end closed? Check. Tax return completed? Check. Employee benefit plan (EBP) audit scheduled…? Not quite.
Your company’s EBP may not have required an audit last year, but will it this year? There are three criteria to consider when determining if your retirement plan will require an audit:
- First, the number of participants as of the first day of the plan year.
- Second, was your plan considered a large plan (>100 participants) or a small plan (<100 participants) on the Form 5500in the prior year?
- And finally, you must consider the 80-120 Participant Rule.
First, let’s consider who the participants are in your plan. It’s a common misconception that participants only make up the number of individuals electing to make contributions to the plan during the year. In reality, the filing instructions for the Form 5500 state that you are considered a participant of the plan if you fall under any of the following four categories:
- Active participants – Any individuals who are currently employed, covered by the plan and are earning or retaining credited service under the plan
- This includes any individuals who are eligible to have the employer make payments under a code section 401(k) qualified cash or deferred arrangement.
- Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) nonvested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit.
- Retired or separated participants receiving benefits – Individuals who are retired or separated from employment, covered by the plan and are still receiving benefits under the plan
- Other retired or separated participants entitled to future benefits – Any individuals who are retired or separated from employment, covered by the plan and are entitled to begin receiving benefits under the plan in the future
- Deceased participants – Individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan
As you can see, the term “participant” includes much more than just those employees who have elected to make contributions to the plan.
Next, let’s review the prior year’s Form 5500 to see if the return was filed as a “small pension plan” or a “large pension plan.” If the plan was considered a “small pension plan” in the prior year, the Form 5500 will include Schedule I, whereas a “large pension plan” will include Schedule H with audited financial statements.
Finally, we can apply the 80-120 Participant Rule to determine if the plan requires an EBP audit. The filing instructions for the Form 5500 states the following:
“If the number of participants reported on line 5 is between 80 and 120, and a Form 5500 annual return/report 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 Form 5500-SF or a Form 5500 annual return/report was filed for the 2016 plan year as a small plan, including the Schedule I if applicable, and the number entered on line 5 of the 2017 Form 5500 is 120 or less, you may elect to complete the 2017 Form 5500 and schedules in accordance with the instructions for a small plan, including for eligible filers, filing the Form 5500-SF instead of the Form 5500.”
To help simplify the above narrative, we’ve created the below table to assist with your analysis.
Participants (as previously defined) at the beginning of current plan year
|Prior year Form 5500 filed (large plan or small plan)||Current year Form 5500 filing requirements||Is an Audit required?|
|Less than 80||Prior year filing not applicable||Small Plan (Schedule I)||No|
|80-99||Small Plan (Schedule I)||Small Plan (Schedule I)||No|
|80-99||Large Plan (Schedule H)||May elect to file as a Small Plan (Schedule I) or continue as a Large Plan (Schedule H)||If the plan elects to continue as a Large Plan (Schedule H), an audit is required|
|100-120||Small Plan (Schedule I)||May elect to file as Large Plan (Schedule H) or continue as a Small Plan (Schedule I)||If the plan elects to file as a Large Plan (Schedule H) an audit is required|
|100-120||Large Plan (Schedule H)||Large Plan (Schedule H)||Yes|
|More than 120||Prior year filing not applicable||Large Plan (Schedule H)||Yes|
For more information or assistance navigating your organization’s EBP or audit, contact the experts at SST today.
Special thanks to SST Audit Supervisor Chris Adams for providing the content for this post. Click here to learn more about Chris.