Smaller plans on audit radar screen
In the past, only large plans with 100 or more participants required an audit by a qualified independent accountant. But recent rule changes require all plans - large and small - to include an audit report with their returns unless they meet specific guidelines.
The U.S. Department of Labor (DOL) extended the audit requirement to all plans to protect participants in smaller plans for fiduciaries' illegal activities and to safeguard the extraordinary assets that have accumulated in small plans over the past 25 years.
Guidelines
Knowing the expense associated with a plan audit, the DOL has issued specific guidelines smaller plans can follow to avoid the audit requirement. This is great news for small plans. They'll benefit by saving money on audits, but they must fully understand and closely follow the guidelines. Plans with 100 or more participants remain subject to existing audit requirements.
A small plan that meets the requirements annually can indeed exempt itself from the audit requirements that larger plans must meet. But understanding the new requirements beyond this can get a little confusing. Here are the requirements to avoid a small-plan audit:
Qualifying plan assets. At least 95% of plan assets must constitute qualifying plan assets, which include
- Qualifying employer securities
- Shares issued by a registered investment company, such as a mutual fund
- Assets held by an insurer, bank or registered broker-dealer
- Participant loans
- Investment and annuity contracts, and
- Assets in personal brokerage accounts that receive statements from a registered financial institution at least annually
For example, suppose a plan is invested in 24% government bonds, 65% mutual funds, 5% annuity contracts and 6% limited partnerships. Because limited partnerships aren't considered qualifying plan assets, only 94% of the assets meet the definition of qualifying plan assets; therefore, this plan must have an audit. The DOL makes the percentage determination annually at each plan year's beginning.
Bonding requirements. Any person handling nonqualified plan assets must be bonded for at least the nonqualified assets' value. All qualified plans are currently subject to a minimum bonding requirement of 10% of plans assets up to $500,000. The bond must cover any person authorized to transact business on the plan's behalf. The bond's intent is to protect the plan from loss because of a plan fiduciary's fraud or dishonesty. The new bonding requirements for small plans are not in addition to the traditional 10% requirement.
Say a plan includes 25% nonqualifying assets. It would have to obtain 15% additional bonding to equal the total bond level of the percentage of the plan's nonqualifying assets. If the plan includes only 7% nonqualifying assets, no additional bonding is necessary, assuming the plan had the minimum 10% bond in place.
Summary Annual Report. In your Summary Annual Report, include additional detailed information and distribute it to participants annually. In the past, the report's content was mostly a summary of the information on the IRS Form 5500. Now you must include four additional items to avoid a small-plan audit:
- The name of each financial institution holding or issuing qualifying plan assets and the value of the assets issued as of the plan's year end.
- The name of the surety company issuing the bond if more than 5% of the plan assets are nonqualifying assets.
- A notice telling participants they may ask for a free copy of evidence of the required bond and copies of statements from the financial institutions describing the qualifying plan assets, and
- A statement informing participants and beneficiaries that they should contact their regional U.S. DOL office if they are unable to obtain any of the information required to be provided under the Summary Annual Report.
Audit Report
A small plan not meeting these conditions must include a full audit report by a qualified independent accountant. So what is an audit report? It's a comprehensive review of various aspects of a plan, such as participant data, deferral elections (if applicable), investment elections, eligibility, vesting, distributions, loans and financial information associated with the qualified plan. Accountants analyze these items to develop their opinion of the plan, which is included in the audit report.
You must include a complete report with IRS Form 5500 that you file with the DOL annually.
Because each plan has its own unique factors, the cost of this type of audit can vary significantly based on the plan's complexity. A typical plan audit runs anywhere from $5,000 to $10,000 per year on average. Naturally, some plans may cost considerably more and other slightly less.
Asset Protection
The DOL has imposed these new requirements to protect small-plan participants' assets. Most plan will easily comply with these new requirements for Summary Annual Reports, as software vendors update their programs to include the required language. If your plan holds what you believe to be nonqualifying assets, determine their percentage of the total plan assets and whether you need any additional bonding on fiduciaries to cover their value. The new rules are complex - let us know if we can help you decipher them.
