When do you need an audit of your defined contribution retirement plan?
Client’s frequently ask us when they need an audit for their defined contribution retirement plan. All defined contribution retirement plans are required to file a form 5500. If the plan is “small,” the abbreviated 5500-SF should be filed. If the plan is “large,” the full version of the 5500 is required to be filed, along with an audit of the plan’s financial statements. A key piece of information used to determine the size of the plan is the number of plan participants as of the first day of the reporting year. A participant is anyone who is eligible to receive a benefit from the plan. This includes all employees who are eligible to participate in the plan plus any plan account balances that belong to non-employees. Generally, once the plan has more than 100 participants, the plan is considered to be “large.” However, an increase in participants may be due to temporary growth, which could decline in the following year. To smooth the reporting requirements, if the number of participants is between 100 and 120, the plan has the option for one reporting year, to choose to file the same 5500 form the plan filed in the prior year.
Here are a couple scenarios:
- 90 participants in year 1, 122 participants in year 2 = 5500-SF in year 1, 5500 with an audit in year 2.
- 90 participants in year 1, 105 participants in year 2, 110 participants in year 3 = 5500-SF in years 1 and 2, 5500 with an audit in year 3.
- 90 participants in year 1, 105 participants in year 2, 95 participants in year 3 = 5500-SF in years 1, 2 and 3.