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Initial Audit Requirements & Considerations

Here are questions for companies to consider if an employee benefit plan requires an initial audit.

Retirement is a future goal for many employees, and many employers want to help. One way that companies can help employees save is by sponsoring a defined contribution plan, such as a 401(k), 403(b), or an employee stock ownership plan (ESOP). However, plan sponsors may not be aware of the U.S. Department of Labor (DOL) requirements for reporting the activities of an employee benefit plan. A Form 5500 is required to be completed for these plans, and if the plan has a certain number of employees participating in the plan, there could be a requirement to also attach an audited financial statement to the Form 5500.

This article will address some of the questions that arise when an initial audit is required.

Rules to Consider

In general, a Form 5500 that is filed for a pension benefit plan or welfare benefit plan that covers 100 or more participants as of the beginning of the plan year should be completed as a “large plan.” If filing as a “large plan,” then Schedule H must be included, and Schedule H requires an audited financial statement to be attached. For the reporting years ending in 2023 and going forward, the rules have changed for a defined contribution plan, and the count is based on the number of participants with account balances on the first day of the plan year. This is a change from the plan years of 2022 and prior, which generally counted the number of participants by using the number of eligible participants on the first day of the plan year.

Exceptions

As with other rules, there is an exception provided in the Form 5500 instructions called the 80-120 Participant Rule. This exception states that if the number of participants is between 80 and 120, plans can elect to complete the return using the same category as the prior year. For instance, if the plan was properly filed as a small plan in the 2022 plan year, then for the 2023 plan year, if the participant count is 120 or less, the plan can file as a small plan again in 2023.

Another exception to the Form 5500 filing requirements is called the Short Plan Year Rule. This exception states that if the plan had a short year of seven months or less for either the prior plan year or the plan year being reported on the 2023 Form 5500, then an election can be made to defer filing the accountant’s report. For instance, if a plan with a fiscal year of June 30 then changed to a December 31, 2023 year-end, then the audit of the short plan year December 31, 2023 can be deferred to be included with the Form 5500 filing for the calendar year ended December 31, 2024.

Best Practices

Certain circumstances lead to an initial audit of a plan. For instance, a plan might be newly established, or the plan may have recently become subject to the audit requirements by crossing over the 120-participant count as described above. Under auditing standards, the auditor must perform certain procedures on the beginning balances. Therefore, plan sponsors should be keeping records of how the plan has been operated in the past. A short list of items to consider is which entity has been the custodian of the plan assets, which entity has been providing payroll services, and who are the personnel at the plan sponsor who have been operating the plan, such as the vice president of human resources or someone from finance. There are records that your auditor may request. In certain circumstances, it may be necessary to provide documentation of eligibility and compensation for a year prior to the year under audit, since the auditor may need to test this data as part of the required audit procedures to verify the beginning balances are accurate. Your auditor should explain further if this circumstance is applicable.

If you have questions on initial audit requirements or need assistance, please contact an employee benefit plan audit professional at Forvis Mazars.

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