Plan Participant Numbers Hold The Key
Taxes. Taxes. TAXES! Now that the prior year is over, taxes are all anybody wants to discuss. However, there is one additional task many business leaders overlook during the whirlwind of the new calendar year: determining your retirement plan’s audit requirement.
Here’s the deal, if the plan has a calendar year end, plan sponsors can already determine whether they will be audited in 2018. Yes, you read that correctly. We are not talking about 2017; we are talking about 2018. This means that if you haven’t already looked into 2017’s audit requirement, you are actually behind (not late, but behind).
Listen To: Is Your Retirement Plan In Compliance?
The Basics
The audit requirement is based on a number of participants. Seems pretty straight forward, right? Well, wait just a minute. We need to take a closer look at the word “participant.” For plan audit purposes, “participant” not only includes those considered active within the plan, it also includes those who were terminated with a balance and anyone who is eligible to participate but is not actively participating.
No Need To Audit
The only plans that are not required to have a plan audit are “small plans.” To be considered a small plan, yours must be a plan with fewer than 100 participants (see previous paragraph for clarification on the word “participant”).
All Aboard The Audit Train
So, if plans with fewer than 100 participants aren’t required to undergo an audit, that means plan sponsors who manage plans with more than 100 participants as of the beginning of the plan year (Jan. 1 for those running on a calendar year), should expect an audit to be required as part of the plan’s Form 5500 filing process.
The 80-120 Rule
There is one caveat to the basics noted above that allows some plans to delay the audit requirement: the 80-120 rule. Per this rule, a plan with between 80 and 120 participants can continue to file the Form 5500 in the same manner as the previous year, i.e. continuing as a “small plan” filer without the audit requirement. This extends the audit requirement line to 120 participants rather than the initial 100. However, once the 120 line has been crossed at the beginning of the plan year, an audit will be required on an annual basis until the participant count has dropped below the “small plan” 100.
When the Audit is Inevitable
As Jan. 1 has already come and gone, there’s literally nothing that can be done about the count for calendar year 2018. (I’m still working on that time machine, folks!) If you and your third party administrator run the numbers and determine that the count meets the audit requirement, the best practice you can now apply is to begin your search for the right auditor. Too often, this process is delayed until we find ourselves closer to the Form 5500 filing deadline, preventing plan sponsors from applying sufficient time to engage an auditor who can appropriately complete the audit requirements of the Department of Labor. And, as we already know, waiting until the 11th hour benefits nobody.
The Department of Labor’s Employee Benefits Security Administration has compiled a short guide on selecting an auditor should you need a starting point for your search. You can also reach out to the retirement plan audit and consulting team at Rea & Associates for direction with regard to the plan audit process.
By Darlene Finzer, CPA, CSA, QKA (New Philadelphia office)
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