Business growth is generally considered a blessing—a sign that things are moving in the right direction—but it could also have implications for your company’s retirement plan. If your business is growing and employee headcount is increasing, it’s likely that you will soon be required to hire an independent auditor for a government-mandated annual audit of your plan.
A retirement plan audit could cost $12,000 to $15,000 annually (and would probably be on the higher side the first year), so you want to make sure you are prepared. Check out these quick questions and answers to make sure you’re ready:
What triggers an independent audit of your retirement plan?
If your company’s qualified retirement plan has fewer than 100 participants, then you likely won’t need an independent audit. However, if you close the plan year with 100 participants, federal law generally does require that your plan undergo an independent audit to report on the plan's financial conditions, investments, and operations. This number includes all eligible employees, whether or not they choose to participate, as well as all terminated, retired, or deceased employees (and beneficiaries) with balances.
What do I need to know about Form 5500?
Form 5500 is an annual report that must be filed for employee benefit plans at the end of each fiscal year by the plan administrator. Depending on the number of participants in the plan, you will file one of two versions: the long (or standard) version meant for “large” benefit plans, or the short version for “small” benefit plans. To be considered small in the eyes of the IRS, you must have fewer than 100 eligible participants at the beginning of the plan year.
401(k) and 403(b) plans that are filed as “large” on Form 5500 must be audited by an external and independent accounting firm. Although audits are often seen as a nuisance, these audits ensure that your plan is operating in accordance with Department of Labor (DOL) and Internal Revenue Service (IRS) requirements. While you, as the plan sponsor, will always have fiduciary duty over your plan no matter its size, an independent audit can provide an extra level of assurance that you are acting in your participants’ best interests.
Can I avoid or delay the audit?
If your business is growing and your headcount is increasing, you may not be able to avoid the audit, but you may be able to delay it under certain circumstances. You can continue to file the shortened version of the form if you meet both of the following conditions:
- Have between 80 and 120 participants
- Were considered a small plan in the previous year
However, when you report at least 121 participants, you must file as a large plan. Plus, once you file as a large plan, you must continue to file as a large plan as long as you have at least 100 participants in your plan—even if you still have less than 120 participants.
With that said, there are some things you could do to delay filing as a large plan and the need for an external audit, so you should talk to your plan administrator to figure out which options are available to you. For example, you can keep headcount below 120 participants by using the plan’s force-out provision. You could also consider increasing the eligibility service requirement.
How should I prepare for an audit?
If your business is approaching the 100-participant threshold, we recommend you do the following to prepare for the audit:
1. Make sure your plan is compliant
It might go without saying, but make sure you comply with reporting requirements and timeliness of deposits so that your auditor can easily issue a clean opinion. Become familiar with your plan document and its clauses, since this is the rulebook you need to follow.
2. Have your documents ready
No audit looks the same, but you can bet that you’ll need to provide documents for review. You should be prepared to provide items like your plan documents and amendments, investment policy statements, distribution information, a listing of eligible participants and discrimination test results.
3. Communicate with your auditor beforehand
The more information you have, the better it will be in the long run. Communicate with your auditor before the audit process even starts to gain an understanding of what will be needed, when it is needed, and details on the process.
What kind of plan management help is available?
Managing the compliance requirements of your company’s retirement plan can be challenging—especially with changing rules and regulations from the DOL and IRS. That’s why it’s important to have a clear understanding of your plan’s operations. If you have questions or need assistance with an upcoming benefit plan audit, we can help.
We specialize in delivering customized retirement plan fiduciary guidance to small and mid-size companies like yours. We strive to simplify your life as a plan sponsor by shouldering more responsibilities so that you can maintain confidence that your plan is well-managed and your fiduciary obligations are met.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
AIF®, Series 7 & 63 Securities Registrations,1 Series 65 & 66 Advisory Registrations† Bill has more than 25 years of experience managing employer-sponsored retirement plans and individual retirement assets. He is responsible for maintaining a high-level of service for 401k and 403b clients, as well as nurturing the growth and development of this area. Beyond these specialties, his experience includes plan design consulting, administration, employee...Read More