Understanding when audited financial statements of a retirement plan are required to be attached to a Form 5500 is an important part of demonstrating fiduciary responsibility over the plan and preventing unnecessary fines for an invalid filing of the 5500.
A plan is required to have an audit attached to the Form 5500 when they are a “large plan”. For plan years beginning on or after January 1, 2023, the plan has an audit requirement if they have 100 participants with account balances as of the first day of the plan year. For plans that start during the year, the audit requirement would be based on the number of participants with account balances on the last day of the plan year, which, if over 100 participants, would trigger the need for an audit.
Plans can utilize the 80/120 rule, which allows a plan to file its current year Form 5500 in the same category as the previous year as long as the number of participants with account balances remains between 80 and 120.
Although small plans, defined as those with less than 100 participants with account balances on the first day of the plan year, do not meet the requirement to have an audit, small plans are still subject to the rules and regulations under ERISA (some safe harbor provisions exist for small plans, which are not available to large plans). Fiduciaries of small plans should be familiar with the ERISA guidelines to monitor compliance with necessary regulations.
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Small plans are still required to file an annual report with the Internal Revenue Service utilizing either Form 5500-SF (“short form”) or Form 5500-EZ, as opposed to a complete Form 5500, if they meet certain requirements. A plan can file a Form 5500-EZ if the plan covers only a business owner and their spouse. Form 5500-SF can be filed if the plan meets the following conditions:
- There are less than 100 participants with account balances as of the first day of the plan year.
- The plan holds no employer securities.
- The plan is 100% invested in “eligible plan assets” with readily determinable fair value (e.g., mutual funds, variable annuities).
One of the more important safe harbor provisions attributable to small plans is the benefit of the seven-day safe harbor rule for employee contributions. For large plans, participants’ contributions must be remitted to the plan as soon as those funds can be reasonably segregated from the general assets of the plan sponsor. Small plans are deemed to have timely remitted participants contributions if the funds are deposited within seven days of receipt.
Plan administrators should review their prior year Form 5500, Part II, line 6g(2) to determine the number of participants with account balances as of the end of the prior year. That number will be utilized to determine the number of participants with account balances on the first day of the Plan year in order to determine if the Plan meets the audit requirement.
Author: Danielle Baird | [email protected]
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