Money Talks: Price Sometimes Trumps Value
Small retirement plans are exempt from the financial statement audit retirement for a reason: not because they don’t need the oversight or the help, but because audits are not practical, affordable, or cost-effective for them. In the real world, money talks. If small plans or their plan sponsors had to bear the cost of paying an Independent Qualified Public Accountant (IQPA) for a financial statement audit, there is a good chance that those employees would not have an employer-sponsored plan. Statistics show that employees are more likely to save for retirement through an employer-sponsored plan, so the Department of Labor has always granted an audit waiver for plans with fewer than 100 eligible employees plus the number of account balances for terminated employees. This counting methodology is effective through the 2022 filings. Who counts changed in 2023, which was outlined in our previous blog – Learning How to Count Again.
Why did the Counting Methodology Change?
Counting eligible participants works most of the time, but it can be unfair for plans with low participation. There are nearly 19,000 large plans that are subject to an audit requirement based on the number of eligible participants even though they have fewer than 100 participant account balances. Industries with high turnover, part-time, and low-paid employees tend to have low participation. Those plans meet the definition of a large plan that is subject to an audit based on the number of eligible participants, but if we used the number of account balances as the criteria, they would be exempt from the audit requirement.
The Department of Labor knew that the situation would be exacerbated when the Long-Term, Part-Time Employee (LTPT) rules become effective after December 31, 2024. When LTPT employees are mandatorily offered the opportunity to contribute elective deferrals to their employer-sponsored retirement plans, the number of eligible participants who do not contribute will most likely increase significantly.
Counting account balances instead of eligibility solves the unwanted audit problem for defined contribution plans. Effective for plan years after January 1, 2023, the number of account balances determines whether an audit is needed.
The New Counting Methodology and the 80-120 Exception Work Together
There is always an exception. In this case, 100 participants, as defined under each methodology, is the threshold for being subject to an audit, EXCEPT that plans that have between 80 and 120 participants on the first day of the plan year can elect to file the same size Form 5500 filing as the previous year. The 80-120 exception is not available for new plans or welfare plans that did not file a Form 5500 in the previous year.
This means a plan can have 119 balances and still not be subject to an audit!
What to File:
- Form 5500 – Large Plans – Schedule H – Must Include an Audit
- Form 5500 – Small Plans – Schedule I – No Audit
- Form 5500SF – Small Plans that meet certain criteria – No Audit
Please refer to our recent blog “Learning to Count Again” for specifics on how to fill out the participant count section of Form 5500.
A plan with fewer than 100 account balances would file a Form 5500 with a Schedule I, or a Form 5500-SF, if eligible. Similarly, a Plan with 119 balances using the 80-120 exception would file a Form 5500 with a Schedule I or a Form 5500SF, without audited financial statements, unless the small plan had non-qualifying assets that eliminate its eligibility for the audit waiver.
Small Plans Can be Subject to an Audit
Small plans that invest in non-qualifying plan assets are subject to a financial statement audit if they do not obtain a fidelity bond that covers 100% of their value. Non-qualifying plan assets are assets that are not held by regulated financial institutions such as banks, insurance companies, registered brokers, mutual fund companies. Some examples of non-qualifying assets are real estate holdings and limited partnerships. Since the fidelity bond is significantly cheaper than an audit, small plans that need an audit are rare, and the situation is usually the result of an oversight that is quickly remedied with the purchase of a fidelity bond.
Counting the Auditors Out
In the end, the regulators’ intent is clear, plans with fewer than 100 account balances, (or 120 if the 80-120 exception is applicable) are exempt from undergoing an IQPA audit. To incentivize employer-sponsored plans, the regulators have instructed us to count what counts, account balances, not eligibility and in doing so, they have counted auditors right out of auditing nearly 19,000 plans.
More than Happy to Count Myself Out
Some people know the price of everything and the value of nothing. I know both. When it comes to large plans with few balances, I hope to keep the services that add value, in the form of operational assistance and consulting as needed, and shed the checklists, interviews, and required documentation that add more cost than value. Auditors sell time, so they must count their hours. Because of the new rules, we will be able to count only the hours that count, and otherwise, we will count ourselves out.
