The Audit Requirement
Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500). The plan will file as either a “large” or “small” plan based upon the number of eligible participants. A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I. A “large” plan must also file an audit conducted by an independent auditor with the Form 5500.
Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year. However, this general rule is subject to the “80-120 rule” (DOL reg. 2520.103-1(d)). Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category of form it filed the year before. This is most applicable when a plan filed as a “small” plan in the prior year but the number of participants at the beginning of the current plan year is between 100 and 120. The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.
Also, “large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement. As well, plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
Under certain conditions, a “small” plan may not use the audit waiver and will have to be audited. To use the audit waiver the following conditions must be met:
- If more than 5% of the assets are nonqualifying plan assets then any person who handles the nonqualifying plan assets must be covered by a fidelity bond (and the amount of the fidelity bond must be at least equal to the value of the related assets).
- The summary annual report must contain the required disclosures.
- If requested by a participant or beneficiary, the plan administrator, must make available for examination without charge, or upon request furnishes copies of, each regulated financial institution statement and evidence of any required bond.