January 1 Plan Mergers and the One-Day Audit Controversy

Back to Basics: Final Form 5500 Rules

Intuitively, it makes sense that a retirement plan that is subject to reporting requirements will have a Form 5500 filing obligation as long as the plan has assets. According to the Form 5500 instructions, a plan sponsor can file a Final Form 5500 “If all assets under the plan (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or legally transferred to the control of another plan, and when all liabilities for which benefits may be paid under a welfare benefit plan have been satisfied”. In the case of a merger or consolidation, the instructions provide that “a final return/report should be filed for the plan year (12 months or less) that ends when all plan assets were legally transferred to the control of another plan.”

As logical as this rule may seem, it can elicit controversy when misguided clients don’t realize that:

1. the effective date of the plan termination does not determine the year of the final Form 5500 filing, the total distribution of the assets does; or that
2. the date when the merged plan assets move to the successor plan’s custodian/recordkeeper does not determine the date that the successor plan has title over those assets, the date of the merger does.

In the case of a plan termination, the final Form 5500 is due the last day of the seventh month after the plan has distributed all assets. The date of the final Form 5500 for a merged plan can be more controversial, because the merger date determines when the title to the assets transfers to the successor plan, regardless of when the money moves from the target plan’s platform to the successor plan, if it has to move at all. In fact, plans can, and often do, have assets at more than one custodian. For example, if the plan merger date is January 1, 2026, the merged plan still has possession and title to all its assets on December 31, 2025 and must file a 2025 Form 5500 and then a Final 2026 Form 5500 showing the transfer of the title to the assets to the successor plan on January 1st, the effective date of the merger, even if the investments don’t move to the successor plan’s custodian until a later date. Ideally, the successor’s 2026 Form 5500 will reflect the transfer-in of the assets to match the transfer-out reported by the merged plan on Form 5500, line 2l:

In a nutshell, as long as the plan has assets, it has a Form 5500 filing requirement, until the assets are all distributed pursuant to a plan termination or until the title to the assets is transferred to another plan pursuant to plan merger. The trouble comes when a January 1 merger date causes a logistically inconvenient and impractical one-day plan year for the merged plan. Hold that thought….

Back to Basics: Plan Audit Requirement Determination

In general, plans with 100 participants who have account balances on the first day of the plan year must attach audited financial statements to their Form 5500. However, 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 rule allows small plans that have been growing from year to year to delay their audit until they have more than 120 account balances. However, the 80-120 exception is not available for new plans or welfare plans that did not file a small plan Form 5500 in the previous year. For the first plan year only, the audit requirement is based on the number of participants at the end of the year.

Plan Merger Date 12/31 vs 1/1: What a Difference One Day Can Make!

A plan that is merged into a successor plan effective January 1st has both, assets and participant account balances on the first day of the plan year. If the number of account balances is 100 or more, the plan needs an audit for that year. In the case of a plan merger effective on January 1st, the target plan effectively needs a one-day plan audit, since the title to the assets transfers to the successor plan on January 1st: Whether you think of the title to the assets transferring at 12:01AM or 11:59PM, we are still faced with the inconvenience of a one-day plan year that requires a one-day plan audit!

Challenges and Push-Back: Can We Pretend the Merger Date was Different?

Pretending the Merger Happened on December 31: When we are the auditors for a target plan that is merged into another plan that we do not audit effective January 1st, we are often asked if we can pretend that the merger is effective one day early, on December 31st, so that we can file a final Form 5500, showing zero assets as of December 31st. Without question, this would be a practical solution if the successor plan’s auditor and Form 5500 preparer are also willing to pretend that the merger date was one-day early. The successor plan’s Form 5500 preparer and auditor would have to be willing to report a corresponding acceptance of title to the merged plan’s assets as of December 31st, which means reporting it on the previous year’s Form 5500 and corresponding audit report. Both parties are not always willing to pretend the merger date was something different than the date on the merger agreement. As a general rule, the target plan and successor plan should exchange title to the assets contemporaneously, but cash-basis reporting will sometimes result in the successor plan reporting receipt of the assets on the settlement date, after January 1st, even for plans that had a December 31 merger date. So do we really need to sweat those two minutes between 11:59pm and 12:01am?

Pretending the Merger Happened When the Assets Transferred: Sometimes, bundled recordkeepers cannot keep the books for assets held at a separate custodian, so they request that the merged plan extend their Final 5500 through the date of the asset transfer. For example, if the merger date is January 1st, but the assets transfer on April 30th, the recordkeeper or TPA for the successor plan would insist that the merged plan’s short year Form 5500 must go through April 30th, the date of the asset transfer, regardless of the merger date. In many cases, the successor plan has accepted the participants and their new contributions, but they don’t accept the title to the assets until the money moves, even though the merger document transferred the title as of a specific date, January 1st. This is also a practical solution that is conceptually incorrect but frequently requested. Some merger documents indicate the title transfers when the assets move to the successor plan, which solves this dilemma. Please keep in mind that as long as the Form 5500 of a previously audited plan shows 100 balances or more on the first day of the plan year, the plan will be subject to one more audit. The deadline for the final audit will be the last day of the seventh month after the plan no longer has funds.

I have asked the DOL’s Division of Reporting and Compliance about this issue and they acknowledge that there is a variety of approaches in practice to this issue, and although the correct course of action is to complete a one-day final Form 5500 and audit report, with a corresponding acceptance of the title to the assets by the successor plan, the DOL’s main concern is that the transfer of participant account balances from plan to plan be subject to audit procedures. To EBSA, an independent verification of the transfer is the most important practical consideration and they will assist with the reporting requirements as needed.

Reasons to Use January 1st rather than December 31st

Plan mergers and stock acquisitions benefit from a grace period in which the coverage test is deemed to pass if each one of the plans passed the coverage test prior to the transaction, if there are no significant plan amendments during the transition period. The IRC Section 410(b)(6)(C) transition period lasts until the end of the plan year following the year of the transaction.

As you can see, a one-day difference in merger date results in a whole extra year of the plans being exempt from the coverage test. Depending on the situation and the complexity of the plans involved, the attorneys may think that a one-day audit is a small price to pay compared to the potential cost of a failed coverage test. Audits are seldom considered the lesser of two evils, so I’ll take it.