When it comes to the administration of retirement plans, there are so many legal requirements to meet that errors do happen. There are small errors and large errors. Errors that can be self corrected and errors that need the approval of the Internal Revenue Service. There are errors that cost nothing to fix and there are errors that cost tens of thousands of dollars to fix. So when I look at big errors, especially one that can be avoided is the failure of a plan to file a required plan audit with their Form 5500
All plans that are subject to ERISA are required to Form 5500. Plans that are considered large plans must have the 5500 form attached with an audit prepared by a qualified independent public accountant. A large Plan is an ERISA based (profit sharing, Plan that has over 100 participants at the beginning of the Plan year. A participant is defined as follows:
- Active participants – those individuals currently employed with the plan sponsor and who are covered under the plan. An active participant would include those employees who have elected to participate in the Plan as well as those who are eligible to participate but have elected not to do so (i.e., not deferring in a 401(k) plan)
- Retired or separated participants – those individuals who are no longer employed by the employer but who are receiving benefits or are entitled to receive benefits under the Plan.
- Deceased participants – those individuals who are deceased and have one or more beneficiaries receiving or entitled to receive benefits.
There are two exceptions to this audit requirement, a plan where the Plan Year for that year is 7 months or less or when the plan goes from 80 participants in one year to less 120 the next year (the 80/120 rule).
So for those scoring at home, if a 401(k) plan has 3,000 people who have met the eligibility requirements (including being employed on the plan’s entry date), but only 3 people have account balances because the plan only allows employee salary deferrals, it must be audited while the plan with 99 people who have met the eligibility requirements and all have account balances, does not. That isn’t fair, but neither is life.
One would think that the audit rule is pretty easy to comply with, but there have been quite a few times where I’ve seen the plan sponsor fail to comply with this requirement. Why is it easy to flub? It happens when you have a third party administrator (TPA) who is sleeping at the wheel because not only is the audit required to be attached to the Form 5500, the auditor’s information also pops up on Schedule H so a TPA can’t say they didn’t know whether the plan sponsor got an auditor and at the very least, the TPA should at least get a copy of the audit for their files. Sure the plan sponsor is ultimately on the hook for failing to get an audit, but plan sponsors need to understand the requirement for an audit and who better to let them know about it than their TPA.
Not filing an audit with the Form 5500 isn’t the same as forgetting to send in a check for your electric bill. Failing to file an audit with your Form 5500 is the same as not filing a Form 5500 at all. Failing to file a Form 5500 could subject the plan sponsor to tens of thousands of dollars of penalties. In addition, the failure to file a required tax return has no statute of limitations so the Department of Labor could sock the plan sponsor from the beginning of time or the beginning of when the plan sponsor was required to file an audit.
So this lesson has been brought to you by the numbers 5500 (for Form 5500) and 100 (the number of participants under a plan that requires a plan audit except plans that fall under the 80/120 rule).