Generally, defined contribution or defined benefit plans with 100 or more participants on the first day of the plan year are subject to the audit requirement. However, there is an exception under the 80 to 120 participant rule. This ruling allows plans with between 80 and 120 participants, as of the first day of the plan year, to file the Form 5500 in the same category (“large plan with audited financial statements” or “small plan without audited financial statements”) as indicated on the prior year Form 5500 filing.
The number of participants dictates whether you have a large or small plan. Employees become includable as “participants” (per the instructions to the Form 5500) on the date which the employee becomes eligible to participate – regardless of whether they contribute to the Plan. In determining the plan’s participant count, it is important to make sure all participants are captured. The participant count must include:
- actively participating employees (employees who are deferring and/or receiving contributions)
- all eligible employees (based on the requirements of the plan document)who have yet to enroll or have elected not to enter the plan (it is very common to inadvertently omit these participants from the count) and
- retired, deceased, or separated employees who still have assets in the plan
Once the proper participant count has been determined the plan administrator may evaluate whether or not an audit is required. The following table illustrates most possibilities:
Plans with more than 120 eligible participants at the beginning of the plan year automatically fall under the audit requirement with no applicable exceptions. If at the inception year of a plan the beginning of year participant count is over 100 an audit is required. Plans with fewer than 100 participants are exempt from the Department of Labor audit requirement. If a plan currently has 100-120 eligible participants but exceeded 120 participants in the prior year, an audit is required until the eligible participant count falls below 100. If a prior year audit was not required and the plan has 100-120 eligible participants, the plan administrator can elect to undergo an audit, but it is not required by the Department of Labor.
Still unsure if your retirement plan needs an audit? Contact us for a second opinion or an independent review of your situation.
- AICPA Employee Benefit Plan Audit Quality Center Planning Tool: Summary of Common EBP Audit Deficiencies, Audit Guidance and Resources
- Selecting an Auditor for Your Employee Benefit Plan