By Michael L. Cecere, CPA, MST
If your company offers employees a benefit plan such as a 401(k), 403(b) or other type of pension, and you have 100 or more employees eligible to participate in the plan, you must submit an audited annual plan financial statement along with the annual Form 5500 to the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS). The due date for filing Form 5500 is the last day of the seventh month after the plan year ends, which is July 31 for a calendar-year plan. There is also a three and one half month extension available if you need more time.
If you are a growing business and are not tracking the number of eligible participants in your plan, you could be caught by surprise by the DOL’s reporting requirements. Specifically, the 100-employee audit “trigger” can seem to be a moving target. If your company grows to 100 employees halfway through the plan year, do you still need to have an audit? What if you begin the year with more than 100 employees but reduce headcount to 90 people before the end of the year? What if not everyone in the company takes part in the plan?
The number of participants used to determine if an audit is required is the number of eligible employees at the beginning of the plan year. So, if you start with fewer than 100 eligible employees, you qualify for an audit waiver for the year, no matter how many more people you hire. Conversely, if in the initial year you start the plan you already start the plan year with 100 or more eligible employees and reduce your workforce below that number, you are still required to have your benefit plan audited.
To help companies that may hover near the 100 eligible participant mark, there is a beneficial rule known as the “80 to 120 Participant Rule”. This Rule allows plans that had between 80 and 120 eligible participants at the beginning of a plan year, and who filed as a small plan (meaning did not have to include an audited financial statement with their Form 5500) in the prior year, to still qualify for the audit waiver by electing to file as a small plan in the current year.
Another common misperception is that only employees who actively contribute to a plan count toward the 100-person audit trigger level. The DOL counts all eligible employees when determining the size of a benefit plan, whether they are participating or not. So even if you have only a handful of employees participating in your company’s 401(k) plan, you may still be required to have the plan audited.
If you are closing in on the audit requirement and want to see if there are ways to postpone or avoid the audit, there are some proactive approaches you can take. For example, you may want to consider amending your plans eligibility requirement by making employees wait a longer period of time before becoming eligible to participate in your plan. This can help reduce the number of “short time” workers who might otherwise be counted as eligible participants.
Don’t forget that designation as an “eligible employee” also extends to employees who have been terminated in prior years but who have not yet rolled over or closed down their accounts. For this reason, you may want to include a provision in your plan that requires distributions to terminated employees who have less than a $1,000 balance in their account, which is allowed by the DOL.
If it is determined that the number of eligible employees in your company meets or exceeds the 100-person trigger point, and you don’t qualify for a waiver under the “80 to 120 Participant Rule,” your next step is to identify and engage a qualified Certified Public Accounting firm with experience in employee benefit plan audits. Doing so is a fiduciary requirement of the plan’s trustees. The complex and precise nature of the audit requirements make it essential that you hire an audit firm with a specialty in benefit plan audits. The penalties for late or incomplete audits can be up to $1,100 per day.
For more information on employee benefit plan audits, for help in determining if an audit is required for your plan, and for ways of potentially postponing or avoiding the audit, contact me at mcecere@gggcpas.com or at (781) 407-0300.
Michael L. Cecere, CPA, MST is a partner with Gray, Gray & Gray, LLP and specializes in employee benefit plan audits.