Large Welfare Plans That Use a Trust Have a Financial Statement Audit Requirement

Updated 3.31.2025

Which Large Welfare Plans Need to Hire a CPA Auditor?

Why do some large welfare plans have to engage an independent qualified public accountant to audit the plan’s financial statements and others have no audit requirement? The answer lies in whether the welfare plan is funded or unfunded.

Funded Welfare Plans: Defined

Funded plans have a separate trust account, which isolates financial activity for the plan. According to the Form 5500 instructions, “Plans that are NOT unfunded include those plans that received employee (or former employee) contributions during the plan year and/or used a trust or separately maintained fund (including a Code section 501(c)(9) trust) to hold plan assets or act as a conduit for the transfer of plan assets during the year.” Unlike retirement plans, there is no legal requirement for single employer welfare plans to be funded via a trust.

The short answer is that if a large welfare plan funnels health and welfare claims and other premium payments through a separate trust account, then the plan must hire an independent qualified public accountant to complete an audit of the plan. It is crucially important to understand that the trust triggers a PLAN audit, such that the auditor does not limit the extent of the audit testing to transactions in the trust account: the claims and the eligibility of participants to those claims under the plan’s contract is a required part of the audit scope. Again, the use of a trust account triggers a plan audit, not a trust audit.

Unfunded and/or Fully Insured Plans: Defined

According to the Form 5500 instructions:

“(a) An unfunded welfare benefit plan has its benefits paid as needed directly from the general assets of the employer or employee organization that sponsors the plan. A welfare benefit plan with employee contributions that is associated with a cafeteria plan under Code section 125 may be treated for annual reporting purposes as an unfunded welfare plan if it meets the requirements of DOL Technical Release 92-01, 57 Fed. Reg. 23272 (June 2, 1992) and 58 Fed. Reg. 45359 (Aug. 27, 1993). The mere receipt of COBRA contributions or other after-tax participant contributions (e.g., retiree contributions) by a cafeteria plan would not by itself affect the availability of the relief provided for cafeteria plans that otherwise meet the requirements of DOL Technical Release 92-01. See 61 Fed. Reg. 41220, 41222-23 (Aug. 7, 1996). “

“(b) A fully insured welfare benefit plan has its benefits provided exclusively through insurance contracts or policies, the premiums of which must be paid directly to the insurance carrier by the employer or employee organization from its general assets or partly from its general assets and partly from contributions by its employees or members (which the employer or employee organization forwards within three (3) months of receipt). The insurance contracts or policies discussed above must be issued by an insurance company or similar organization (such as Blue Cross Blue Shield or a health maintenance organization) that is qualified to do business in any state.”

“(c) A combination unfunded/insured welfare benefit plan has its benefits provided partially as an unfunded plan and partially as a fully insured plan. An example of such a plan is a welfare benefit plan that provides medical benefits as in (a) above and life insurance benefits as in (b) above. See 29 CFR 2520.104- 20.”

Large health and welfare plans that pay claims and premiums out of the employer’s assets or with insurance proceeds do not have to attach audited financial statements to their Form 5500 filing.

What Makes a Health and Welfare Plan a Large Plan?

A large plan is a plan that covers 100 participants or more on the first day of the plan year. Large welfare plans must file a large plan Form 5500. The 80-120 exception available to retirement plans is not available to unfunded, fully insured, or combination unfunded/fully insured welfare plans because they do not have a Form 5500 filing requirement as a small plan, and the exception is available only to plans that filed a Form 5500 in the prior year. As such, the 100-participant threshold is the only applicable criteria to determine if there is a large plan Form 5500 filing requirement for welfare plans.

To determine whether the plan covers fewer than 100 participants for purposes of these filing exemptions for insured and unfunded welfare plans, the instructions for Form 5500, lines 5 and 6, on counting participants in a welfare plan indicate that:

“An individual becomes a participant covered under an employee welfare benefit plan on the earliest of:

• the date designated by the plan as the date on which the individual begins participation in the plan;
• the date on which the individual becomes eligible under the plan for a benefit subject only to occurrence of the contingency for which the benefit is provided; or
• the date on which the individual makes a contribution to the plan, whether voluntary or mandatory. See 29 CFR 2510.3-3(d)(1).
  • This includes former employees who are receiving group health continuation coverage benefits under Part 6 of ERISA and who are covered by the employee welfare benefit plan.
  • Covered dependents are not counted as participants. A child who is an “alternate recipient” entitled to health benefits under a qualified medical child support order (QMCSO) should not be counted as a participant for lines 5 and 6.“

An individual is not a participant covered under an employee welfare plan on the earliest date on which the individual

1. is ineligible to receive any benefit under the plan even if the contingency for which such benefit is provided should occur, and
2. is not designated by the plan as a participant. See 29 CFR 2510.3-3(d)(2)”

How Many Forms 5500 are Due When There are Multiple Policies?

When establishing the filing requirements of a welfare benefit plan or plans, the Form 5500 instructions make it clear that: “it is important to determine whether the plan sponsor has established one or more plans for Form 5500/Form 5500-SF reporting purposes. As a matter of plan design, plan sponsors can offer benefits through various structures and combinations. For example, a plan sponsor could create (i) one plan providing major medical benefits, dental benefits, and vision benefits, (ii) two plans with one providing major medical benefits and the other providing self-insured dental and vision benefits; or (iii) three separate plans.”

The Form 5500 preparer must review the governing documents and actual operations to determine whether welfare benefits are being provided under a single plan or separate plans. The fact that the plan sponsor has separate insurance policies for each different welfare benefit does not necessarily mean that there are separate plans. Some plan sponsors use a “wrap” document to incorporate various benefits and insurance policies into one comprehensive plan.

Which Welfare Plans File What?

As discussed above, the size and funding of a welfare plan determines whether there is a Form 5500 filing requirement, what schedules the filing must include, and whether audited financial statements are required, as follows:

1. No Filing Requirement: Unfunded, fully insured, or combination unfunded/fully insured welfare plans covering fewer than 100 participants at the beginning of the plan year that meet the requirements of 29 CFR 2520.104-20 are exempt from filing an annual report.
2. Form 5500, No Schedule H, No Audit: An unfunded, fully insured, or combination unfunded/fully insured welfare plan with 100 or more participants must file an annual report but is exempt under 29 CFR 2520.104-44 from the accountant’s report requirement and completing Schedule H, but MUST complete Schedule G, Part III, to report any nonexempt transactions. See Form 5500 instructions for other required schedules.
3. Form 5500, Schedule H, Audited Financial Statements: Large, funded welfare plans must file a Form 5500 with the financial statement Schedule H and audited financial statements. In addition, it must file the following schedules:

1. 1. 1. Schedule A (as many as needed), to report insurance and investment contracts held by the plan.
      2. Schedule C, if applicable, to report information on service providers and any terminated accountants or actuaries.
      3. Schedule D, Part I, to list any CCTs, PSAs, MTIAs, and 103-12 IEs in which the plan invested at any time during the plan year.
      4. Schedule G, to report loans or fixed income obligations in default or determined to be uncollectible as of the end of the plan year, leases in default or classified as uncollectible, and nonexempt transactions, i.e., file Schedule G if Schedule H (Form 5500) lines 4b, 4c, and/or 4d are checked ‘‘Yes’’ or if a large welfare plan that is not required to file a Schedule H has nonexempt transactions.
      5. Schedule H, to report financial information, unless exempt. Attach the report of the independent qualified public accountant (IQPA) identified on Schedule H, line 3a, unless line 3d(2) is checked. A welfare benefit plan that uses a ‘‘voluntary employees’ beneficiary association’’ (VEBA) under Code section 501(c)(9) is generally not exempt from the requirement of engaging an IQPA.

However, if funds are segregated from an employer’s general assets and placed in a separate trust or account that is maintained exclusively for the purpose of paying plan benefits and/or reasonable plan administrative expenses, then that separation of the funds may provide an argument to determine that the earmarked funds constitute plan assets, and that the plan is a funded plan. If a welfare plan has a separate account that funnels welfare plan payments for claims and/or insurance, the plan sponsor should retain ERISA counsel or a specialized consultant to determine if a Form 5500 Filing with an audit report is necessary.

Participant contributions, whether paid directly to a plan or indirectly through wage withholding by the employer, are plan assets by definition under the DOL regulations. Specifically, participant contributions become plan assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets and no later than 90 days from the date on which such amounts would have been payable to the participant in cash. This means that even if the employer does not segregate participant contributions used to pay insurance premiums or FSA benefits in a separate account, they are plan assets because the participant could have chosen to be paid those dollars as wages. Although participant contributions are considered to be plan assets, the DOL does not require participant contributions made through a cafeteria plan to be held in a trust, pursuant to EBSA Technical Release 92-01. As such, the existence of a cafeteria plan does not constitute “funding” with respect to the requirement to establish a trust, or for purposes of the large plan financial statement audit determination.

Collectively bargained welfare plans are funded through a VEBA trust. As such, they are funded plans subject to ERISA’s trust requirement. Union welfare plans are typically administered by a board of trustees. The trustees are fiduciaries, subject to the Duty of Loyalty and the Exclusive Benefit Rule. To protect the plan assets, they obtain the required fidelity bond covering every fiduciary who handles plan assets. To protect themselves, the trustees obtain a fiduciary liability policy, which is not required, but is recommended. Collectively bargained, Taft-Hartley plans typically file large plan Forms 5500, including a Schedule H- Financial Information, and an independent qualified public accountant’s opinion (IQPA).

Avoiding the Audit Through an Unfunded Plan

Other than the above-mentioned union plans, which are designed to need a trust to fund the welfare benefits, other employers tend to find the financial statement audit requirement sufficiently costly and inconvenient to motivate them to maintain an unfunded welfare plan, which means paying benefits only from the company’s general assets. As plan auditors, our EBP audit team services several funded welfare plan audits, both for single employers and for collectively bargained plans. Although in certain situations, your benefit consultants may advise you to establish a trust to hold employee contributions and receive contributions to pay benefits, a trust is not required, and many would argue that none is needed. Case in point, of the 150 large retirement plans we audited last year, (other than the unions) only three plan sponsors have placed their welfare plan in a trust, which triggered a plan audit. For the other large plan sponsors, the unfunded, large welfare plan’s Form 5500 did not include a Schedule H, or an audited financial statement. As plan auditors, we have no preference. If the plan sponsor and its consultants see a benefit in a funded welfare plan through a trust, we can audit both, the large retirement plan and the large welfare plan. If a welfare plan sponsor chooses to have no funding, no plan assets, no plan books, and no plan audit……no problem. Like vanilla and chocolate, both funded and unfunded welfare plans are valid choices.