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Case of the Week: Small Plan Form 5500 Audit Waiver

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in California is representative of a common inquiry on Form 5500 filings. The advisor asked:

“What are the rules for small plans with respect to the Form 5500 audit requirement?”

Generally, the Department of Labor (DOL) requires sponsors of employee benefit plans subject to the annual Form 5500 series of returns and schedules to include an audit report from an independent qualified public accountant (IQPA). There is an exception to this requirement for “small plans” (i.e., those with fewer than 100 participants at the beginning of the plan year) (DOL Reg. 2520.104-46).

A plan may qualify for the audit waiver even if there are more than 100 participants. Under the “80 to 120 Participant Rule,” if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan and, therefore, qualify for the audit waiver.

But there are more conditions than just employee count that a plan must satisfy before the Department of Labor (DOL) will give it a pass on the annual audit report. Three key requirements include the following:

1. As of the last day of the preceding plan year at least 95 percent of a small plan’s assets must be “qualifying plan assets”[1. Qualifying plan assets include qualifying employer securities, loans meeting ERISA § 408(b)(1), and assets held by banks, insurance companies, registered broker-dealers, or individual retirement account trustees. Other qualifying assets include shares in mutual funds, investment and annuity contracts issued by insurers, and assets in self-directed individual account plans over which individuals have direct control.] or, if less, then any person who handles assets of a plan that do not constitute “qualifying plan assets” must be bonded in an amount that at least equal to the value of the nonqualifying plan assets he or she handles. (An example of a nonqualifying plan asset would be a real estate limited partnership.)


2. The plan must include certain supplementary information in the Summary Annual Report (SAR) furnished to participants and beneficiaries in addition to the information ordinarily required.


3. In response to a request from any participant or beneficiary, the plan administrator must furnish without charge copies of statements the plan receives from the regulated financial institutions holding or issuing the plan’s qualifying plan assets and evidence of any required fidelity bond.


The DOL has a helpful series of FAQs on its small plan audit waiver regulation, which includes the following decision tree summarizing the considerations related to the Form 5500 audit waiver.

sppawsummary

Conclusion

Sponsors of small employee benefit plans may qualify for a waiver of the annual Form 5500 IQPA audit report by satisfying the conditions of DOL Reg. 2520.104-46.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2016 Columbia Management Investment Advisers, LLC. Used with permission.

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