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During the past couple of months, many businesses have been going through audits of their company’s retirement plan. As you may know, these compliance audits differ vastly from the traditional financial statement audits. This is due to not only the compliance regulations of these plans, but also the different method of accounting for retirement plans. This article is intended to briefly cover the basics of retirement plan audits so that you and your company can better understand how they work and when you might need one.
To start off, there are two main types of retirement plans out there, Defined Benefit Plans and Defined Contribution Plans. Some of the differences between the two are described in the table below:
| Factors | Defined Benefit Plan | Defined Contribution Plan |
| Overview | Employer guaranteed benefit at the time of retirement – investments are employer directed | Contributions to the plan are primarily driven by the employee, with options for the employer to contribute– investments are employee directed |
| Primary Contributors | Employer | Employer and employee |
| Examples | Flat-Benefit Formulas, Career-Average Formulas, and Final-Pay Formulas | 401K, Profit-Sharing, and Employee Stock Ownership Plans |
These retirement plans must file the Form 5500 to the IRS each year that the retirement plan is in effect. The IRS requires these plans to report their financial condition, investments and operations on an annual basis. The Form 5500 is due to the IRS on the last day of the seventh month after the plan year end. If that plan year ended on December 31, the Form 5500 is due on July 31. Plans can also file for a two and a half month extension on or before the regular Form 5500 due date. For a calendar year plan, this extends the due date to October 15.
Federal law requires employee benefit plans with 100 or more participants to have an annual audit of the plan’s financial statements to be prepared by an independent qualified public accountant as part of their obligation to file the Form 5500. The Department of Labor (DOL) defines a participant in a retirement plan as any actively participating employee; former employee of an organization who still maintains a balance in the plan; and any current employee who is eligible to participate in the plan, this includes those who have elected not to participate in the plan. If your plan just recently crossed the 100 eligible participant threshold, you may have an option in the first year to choose whether you file as a “large plan” or a “small plan”. The “80-120 Participant Rule” states that if a plan has between 80 and 120 participants as of the first day of the plan year, the plan sponsor may opt to file their form 5500 using the same category as they had in the prior year. By filing as a “small plan” an audited financial statement is not required to be submitted.
The DOL suggests that the company administering the retirement plan choose an independent CPA with extensive experience in auditing employee benefit. By doing so, the company can prevent deficiencies in the independent CPA’s report on the retirement plan.
For any questions regarding retirement plan audits and if your company needs one, please contact your MKS&H representative or call 866-649-1902 to speak to one of our retirement plan audit experts.
