Being proactive about getting your plan ready for an audit can save you a lot of time, money, and frustration. Finding out you need an audit when you go to file Form 5500 for the prior year can be quite shocking if you were not expecting to need an audit. Also, filing a Form 5500 without an audit when one is required will most likely result in a letter from the Department of Labor, and penalties will soon follow if specific deadlines are not met.
The driving factor for an audit of a retirement plan is the number of participants at the beginning of the plan year. This can be found on Form 5500, page 2, item 5 of your current year filing (i.e., the 2020 return if you are filing for calendar 2020). If you look at your prior year Form 5500, look to page 2, line 6f, which is the number as of the end of the preceding year, but then add any participants who became eligible on the first day of your plan year. Please note that this is not just the number of participants actively contributing to the plan; it is the number of eligible participants in the plan plus retired, separated, and deceased participants and their beneficiaries as long as their funds remain in the plan. You may need to work with your third-party administrator to determine the participant count.
Once you have determined the number of participants at the beginning of the plan year, you will be able to determine if your plan needs an audit. The table below gives a snapshot of what Form 5500 can be used and when an audit is necessary.
|Number of participants||Form required||Audit required|
|Less than 80||5500-SF||No|
|80-99||5500-SF or 5500||Optional|
|100-120 with 5500-SF in PY||5500-SF or 5500||Optional|
|100-120 with 5500 in PY||5500||Yes|
The rules highlight the importance of ensuring your participant count is accurate at the beginning of any plan year. Be sure to report terminations to your provider timely so that former employees can receive information on distributing their funds, and make sure you provide accurate census data, such as hire dates and birth dates, to the provider so that eligibility can be designated appropriately.
Health and welfare plans have similar requirements but have nuances depending on whether the plan is funded (including held in a trust) or fully insured.
If you have any questions on determining if your plan needs an audit, reach out to any member of Aronson’s Employee Benefit Plan Services Group.