Does your retirement plan need an audit?

Is your 401k or 403b plan going to need an audit this year? The rules are a little goofy to explain. Only plans that the IRS considers to be "large" plans need to submit an independent auditor's report along with their Form 5500 filing. "Large" means 100 or more participants BUT there's the 80/120 Rule that says if the year prior you filed on the Short Form 5500 and you have under 120 participants, then you DON'T have to have an audit. Here's the DOL's Audit FAQs: http://www.dol.gov/ebsa/faqs/faq_auditwaiver.html

Let's look at some examples.

Existing plan: Let's say last year you filed a 5500-SF for your 403b. The plan would not need an audit until participants were 120 or greater on 1/1 of a plan year. This would mean that as long as you either stay under 120 participants for 1/1 (or you terminate the plan prior), the 403b won't need an audit.

New plan rules: In a plan's initial year of existence, the cutoff for determining if your plan is to be classified as a large or small plan is 100 eligible participants.  A large plan filing the Form 5500 (over 100 participants) will be required to complete Schedule H which is what ultimately triggers the audit requirement. After the year of inception, the filing status of your plan is determined by the number of eligible participants as of the first day of the plan year and we look to the 80/120 rule and whether you filed a Short Form 5500 or not in the previous year to determine whether the audit is needed.

So, let's say in a new plan 79 employees would be eligible, which is less than 100. That would mean no audit for the plan year AND would start it off on the Short Form for subsequent years. You could delay an audit until the year you cross the 120 mark on 1/1.

Let's say 115 employees are eligible for this new plan, which means the plan would have 100 or more participants in its first year, would file the Long Form 5500 with Schedule H, and would definitely need an audit for the plan year and every year after unless the plan falls below 80 participants on 1/1 someday.

Your best bet? Ask an auditor to confirm whether or not your plan needs and audit. We don't provide tax or legal advice!
 

Need innovative ideas on getting your participant count manageable? Reach out!