by SST Audit Manager, Aaron Lohman
Year-end closed: check. Tax return completed: check. Employee benefit plan (EBP) audit scheduled…??
Your plan did not require 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 5500 in the prior year? And finally, you must consider the 80-120 Participant Rule.
First, let’s consider active participants. What does this mean? It is a common misconception to believe this is only the number of individuals electing to make contributions to the plan during the year. Let’s go straight to the source. The filing instructions for the Form 5500 state that:
“Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect 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.”
As you can see, active participants include those who have elected to make contributions, those who are eligible (even if they have elected not to currently make contributions), and those who have separated employment, but still have vested funds in 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”. Small pension plans include Schedule I, whereas large pension plans include Schedule H with audited financial statements.
Finally, we can apply the 80-120 Rule and determine our audit requirement. Again, let’s go straight to the source. The filing instructions for the Form 5500 state:
“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.”
Refer to the table below to determine our audit requirements.
|Participants (as previously defined) at the beginning of current the 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||No|
|80-99||Small Plan||Small Plan||No|
|80-99||Large Plan||May elect to file as a Small Plan or continue as a Large Plan||If the plan elects to continue as a Large Plan an audit is required|
|100-120||Small Plan||May elect to file as Large Plan or continue as a Small Plan||If the plan elects to file as a Large Plan an audit is required|
|100-120||Large Plan||Large Plan||Yes|
|More than 120||Prior year filing not applicable||Large Plan||Yes|
For scheduling, or more information on EBP audits, contact our team at firstname.lastname@example.org. Our team of specialized auditors have the skills needed to serve you and your organization.