Does My Benefit Plan Really Need an Audit?
Understanding the 80-120 Participant Rule
When it comes to determining the size of your employee benefit plan, nothing seems to cause more confusion among plan sponsors than the so-called “80-120 Participant Rule.”
In general, Department of Labor (DOL) regulations require that “large” plans, which consist of 100 or more participants, be audited by a qualified independent CPA. Problems occur with plans that fluctuate between slightly more or less than 100 participants. Under a strict interpretation of DOL rules, these plans would have to switch between being categorized as a small plan and a large plan. However, many plan administrators find this inconvenient and disruptive.
Fortunately, DOL Regulation 2520 103-1(c) and (d) provides an exception to this general rule. Plans that have between 80 and 120 participants (inclusive) at the beginning of the current plan year have the option to elect to complete the current year return using the same plan category (“large” or “small”) that was used in the previous year.
For example, if a plan had 115 participants at the beginning of the 2015 plan year but was considered a “small” plan for the previous year, the plan could opt to file its Form 5500 using the small plan category again in 2015. It could continue doing so in subsequent years until the number of participants exceeded 120.
Likewise, if a plan had 95 participants at the beginning of 2014 but filed its Form 5500 as a large plan in the previous year, the plan has the choice to file as a small plan or file the same way it did in the previous year. The plan may continue to file this way until the participant count drops below 80, at which point the plan must file as a small plan.
Here, it’s important to note that employees become includable as participants on the date when the employee becomes eligible to participate — regardless of whether he or she elects to actively contribute to the plan. Your participant count must include all of the following:
- Actively participating employees;
- Retired, deceased or separated employees who still have assets in the plan; and
- All eligible employees who have yet to enroll or have elected not to enter the plan.
Are You Ready for an EBP Audit?
So what happens when you finally exceed your small plan and are now required to have your large plan audited? How will you prepare?
Experienced auditors say the key to a smooth annual employee benefit plan audit is to have everything ready for your audit team when they arrive. Whether this is a first-time audit for your plan, or you just want to make this year’s audit run as smooth as possible, we’ve compiled some best practices to consider during your audit preparation:
- At least one month out – Begin gathering plan-related and investment-related documents. Most plan providers offer an “Auditor’s Package”, which includes the majority of the information needed to get your auditor started on planning. As a best practice, these documents should be easily accessible, organized and current. Ask your auditor for a planning list or checklist of documents you will need.
- Tip: Inform your auditor of any significant changes to the plan (changes in third-party administrators, new investments, amendments to plan documents, etc.), as well as any new issues or concerns since the last audit.
- Tip: Confirm whether your plan needs a “limited” or “full” scope audit. Your auditor will require a certification from your plan provider if performing a limited-scope audit (read more about the different scopes here).
- Two or three weeks out – Perform your own internal audit. Pull data on a few plan participants and run some test calculations to uncover any obvious deficiencies.
- Tip: Reconcile data among all service providers prior to the audit. For example, ensure that the trustee investment statements match the participant account information, and reconcile the total employee deferrals on your payroll reports to the participant account information provided by your third-party administrator. This can help to identify late contributions, which are required to be reported in Form 5500.
- The day of – Be prepared for a 30-60 minute kick-off meeting. Have the appropriate plan administrators on hand or available by phone to answer general questions and provide an overview of significant events that occurred during the plan year. Plan for a brief status meeting at the end of the first day.
- Tip: It’s critical to have a dedicated contact person available to address additional questions and needs while your audit team is onsite.
- As the audit progresses – Request weekly status updates to ensure that there are no pending requests or open items that need to be addressed.
- Tip: To allow sufficient time for review, ask to receive drafts of the financial statements, internal control recommendations/management letter, and the management representation letter a week or two prior to the expected report issuance.
We have included some helpful links on Employee Benefit Plans guidelines and requirements:
- Reporting and Disclosure Guide for Employee Benefit Plans
- Retirement Plan Reporting and Disclosure Requirements
- AICPA Section 403(b) Retirement Plans: Form 5500 Reporting and Independent Audit Requirements
- 2014 Form 5500 Instructions
Contact us if you would like additional guidance on issues of participant counts, audits, and the 80-120 Participant Rule.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
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