By Christopher J. Ciminera
You are a nonprofit and your organization has a Code section 403(b) retirement plan, but is an independent qualified plan audit required to be attached to the 5500 filing? Let’s look further into the requirement of a retirement plan to attach an independent qualified plan audit to the 5500 filing.
First, the organization should determine whether its plan is covered by ERISA. If it is covered by ERISA, then the plan may have to file a 5500. If not, then the plan doesn’t need to file a 5500, and does not need a retirement plan audit. Plans not covered by Title 1 of ERISA are:
- deferral only, tax-deferred annuity 403(b) plans in which the employer has limited involvement as described in Field Assistance Bulletin (FAB) 2010-01
- federal, state, or local government plans, including plans of international organizations
- certain church or church association plans
- plans maintained solely to comply with state workers’ compensation, unemployment compensation, or disability insurance laws
- plans maintained outside the United States primarily for non-resident aliens
- unfunded excess benefit plans maintained solely to provide benefits or contributions in excess of those allowable for tax-qualified plans.
Additional Plan Criteria
If the retirement plan is covered by ERISA, there are additional criteria to consider. Let’s discuss the terms “large plan” and “small plan,” which determine if an audit is needed with the 5500 filing. If your plan is a “large plan,” then you may need to have an audit performed on your retirement plan. Generally, a “large plan” filer is an organization that has a retirement plan that benefits 100 or more participants at the beginning of the plan year. On the other hand, a “small plan” generally benefits fewer than 100 participants at the beginning of the year. An important definition to consider is the definition of a participant, as reported on Line 5 of the Form 5500, including:
- active participants (employees eligible to participate in the plan, regardless of whether they are actively contributing to the plan)
- retired or separated participants receiving benefits (a retired or separated employee receiving distributions from the plan)
- other retired or separated participants entitled to future benefits (a retired or separated employee entitled to receive distributions from the plan)
- deceased individuals who had one or more beneficiaries who are receiving or are entitled to receive benefits under the plan.
ERISA Audit Exceptions
Now, let’s discuss the exceptions to the “large plan” and “small plan” rule above. The first exception to the 100 participant rule is the 80-120 participant rule. The 80-120 participant rule states that you may elect to file as the type of plan you filed in the previous year if your retirement plan benefits between 80 and 120 participants on the first day of the plan year. For example, an organization’s retirement plan had 99 participants in the prior year and filed as a “small plan.” As of the first day of the current year, the organization’s retirement plan benefits 120 participants. In the current year, the organization may elect to file as a “small plan.” In subsequent years, the organization may continue electing to file as a “small plan” each consecutive year that it does not exceed the 120 participant mark. Once the organization’s retirement plan benefits over 120 participants on the first day of the plan year, then the plan must file as a “large plan” and must attach an independent qualified plan audit to its 5500 filing. For further information please refer to ‘I Don’t Want to Grow Up, I Want to Be a Small Plan’ from our Employee Benefit Plan Audit Blog.
There is one other exclusion, specifically for 403(b) plans, that the Department of Labor provided relief. 403(b) plan sponsors can choose to exclude pre-2009 contracts from the participant count if they meet the following criteria:
- the contract or account was issued to a current or former employee before January 1, 2009
- the employer ceased to have any obligation to make contributions (including salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009
- all rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer
- the individual owner of the contract is fully vested in the contract or account.
In conclusion, after determining if the plan is covered by ERISA, an organization must determine how many participants its retirement plan is benefiting by counting all active participants, including retired or separated participants and their beneficiaries who still have an account balance in the plan, but excluding any pre-2009 contracts meeting the criteria above for these participants if the plan sponsor elects to exclude them. The resulting number of participants is then used to determine if the plan is classified as a “large plan” or “small plan” filing, keeping in mind the 80-120 exception.