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Thursday, April 20, 2017

To Audit or Not to Audit


As an employee benefit plan auditor, I field frequent inquiries from consultants and companies seeking information about the audit requirements for benefit plans. Most conversations go like this:

Me: “Hello!”
Consultant: “Yes, hi. This is Jim Dandy with Everything Benefits Consulting. How are you today?”
Me: “Just dandy Jim! What’s up?”
Consultant: “I have a client who needs a 401(k) audit. Can you do it, and if so, how much will it cost?”
Me: “Yes I can, and it depends. Before we get into cost, what is the participant headcount?”
Consultant: “Oh, they’ve crossed a hundred. We analyzed the census and they have 105 eligible participants. They definitely need an audit!”
Me: “You counted as of the first day of the plan year?”
Consultant: “Absolutely!”
Me: “Okay then, let’s talk about that.”

Jim is certain his client’s plan needs an audit. He knows that most employee benefit plans are required to file a Form 5500 (a joint-agency form developed by the Internal Revenue Service, Department of Labor [DOL], and Pension Benefit Guaranty Corporation) annually with the DOL. He probably knows that, generally, a plan with 100 or more eligible participants is required to file a Form 5500 as a “large plan” filer (deferred vested participants and employees meeting plan eligibility requirements, yet opting out of plan participation, are included in the “eligible” headcount). And, of course, Jim called me because he knows that my firm employs skilled employee benefit plan auditors and he believes that a large plan filing a Form 5500 is required to include an audit opinion with its filing. What Jim doesn’t know is―like all things in life―exceptions exist, plan audit requirements included.

DOL regulations permit a plan having between 80 and 120 participants (inclusive) as of the beginning of the plan year to complete its Form 5500 in the same category, large or small plan filer, as the previous year. This is known as the “80-120 Rule.” Jim confirmed with his client that for all years prior to the plan year in question, the plan filed a Form 5500 as a “small plan” filer, meaning the plan had less than 100 eligible participants for those years and met all other requirements of a small plan. Under the 80-120 Rule, Jim’s client may continue to file as a small plan filer until it crosses the 120 eligible participant threshold, and, no audit is necessary...yet!

A quality employee benefit plan audit can be a great tool for plan sponsors and plan participants. Audits are also expensive. Knowing a few simple rules can prevent you from unnecessarily diverting funds away from other important employee benefits. Each situation is unique, therefore, plan sponsors should always seek professional advice before deciding whether or not to engage a plan auditor.

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