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When Does Your Company's Retirement Plan Require an Audit?

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Retirement plans are a vital part of a company's compensation program and in hiring and retaining a top-notch workforce. Unfortunately, administration of retirement plans is complicated and requires diligence to keep the plans running smoothly and in compliance with the necessary regulations.

The July 31st Form 5500 filing deadline for retirement plans is just around the corner, and it is important for plan sponsors to understand the compliance rules that trigger the audit requirement before it is time to file.

The Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of certain retirement plan financial statements by an independent certified public accountant (CPA). If you sponsor a retirement plan subject to Title I of ERISA, you are subject to annual reporting requirements that may include an audit of the plan’s financial statements.

So, in which cases are companies required to audit their retirement plans?

Small Plan vs. Large Plan

According to ERISA legislation, all retirement plans that have more than 100 eligible participants at the beginning of a plan year are required to have an audit of their financial statements. These plans are considered to be "Large Plans." On the other hand, retirement plans with fewer than 100 eligible participants are considered "Small Plans" and do not require an audit. 

It is importation to recognize that the audit requirement focuses on eligible participants, not just the individuals actively participating in a plan. An organization could have a plan with very few active participants but still require an audit because many employees that are eligible choose not to participate.

There is, however, an exception to the audit requirement called the 80-120 rule. This rule states that if the number of eligible participants exceeds 100 but is less than or equal to 120 at the beginning of a plan year, and the retirement plan has filed as a “Small Plan” in the previous year, the plan sponsor can choose to file as either as a “Small Plan” again, or file as a “Large Plan” which would trigger the audit requirement.

Once the number of eligible retirement plan participants exceeds 120 participants at the beginning of a plan year, the company/plan sponsor is required to file a Form 5500 as a "Large Plan" and have the plan’s financial statements audited. The audit requirement would remain in place until the number of eligible participants drops below 80. Once the audit has been performed, audited financial statements of the plan, the audit report, and Form 5500 are filed together, to assure compliance with the necessary regulations.

Planning Is Key

A plan sponsor who is increasing its number of employees needs to plan for an audit of its retirement plan eventually. An audit of a retirement plan can be a time-consuming and expensive process. However, there are decisions that can be made to defer the audit requirement for a period of time, but these decisions must be evaluated with a full understanding of all the facts and requirements. Our team at MGA can be a valuable partner in this planning process.

Assurance Services

Here at MGA, we provide a wide variety of assurance services, including audits of retirement plans, and we are ready to help you plan today. Let’s talk.

July 18, 2018