Does your retirement plan need an independent audit?

As your company grows, don’t be caught off guard. If in the first year of your retirement plan, the number of your participants is 100 or more at the first day of the plan year, it very likely will fall into the category of a “large plan”. This means if you had 100 or more employees on the first day of your first plan year who have worked for you for over one year, you could very easily have a “large plan”. Plans with the very popular 401(k) provision can only exclude those employees who have worked less than one year so be extra alert for the audit requirement when setting up a new 401(k) plan. If the number of participants in your existing pension plan increases to 120 participants or more at the beginning of any retirement plan year, your plan will fall into the category of a “large plan”. Unlike a small plan, a large plan has additional forms to file with the Department of Labor. These forms are the Schedule C, the Schedule G, and the Schedule H. The Schedule H will require an independent qualified public accountant report to be attached with very limited exceptions. These exceptions are if the plan is:

a. a Common/Collective Trust (CCT),
b. a Master Trust Investment Account (MTIA),
c. a Pooled Separate Account (PSA), or
d. in the first of two consecutive plan years, one of which is a short plan year, subject to certain additional reporting conditions. (29 CFR 2520.104-50).

If an exception has not been met, an independent qualified public accountant report is required to be attached to your form 5500 in order to be filed on time. This means your accountant’s report has the same deadline as the filing of your form 5500. And you shouldn’t wait until the last minute to call around trying to find an auditor! Once you have contracted with a CPA firm to prepare your independent report, they will need copies of your plan documents and you will need to contact your investment company for a copy of your plan financial statements. Additionally, large investment companies will have hired their own independent auditor to perform tests on their internal controls placed in operation and to test operating effectiveness of their investment systems. These tests are complied into a report that is fondly known as the SAS 70 report by your independent auditor. Your independent auditor will need a copy of this report for the entire plan period that is being audited. If you have a defined benefit plan, your actuary must be contacted to receive a copy of your completed valuation report. If you use a third party administrator, they must be contacted to give the auditors a copy of your plan calculations.

Usually, it will take several days for an independent auditor to go through your payroll data and personnel files, gain an understanding of how your retirement plan operates, and interview key members of management. This is usually done on site, so be prepared to find somewhere to put your independent auditor(s) for that period of time. Then, after they leave your site, your auditors will still need time to collect information from your attorney, and collect any odds and ends that were not yet available from the various parties that deal with your retirement plan on a regular basis. These parties are generally not allowed to talk to your auditors without your express written permission which means that you may need to designate someone within your firm to be the liaison between these parties and your independent auditor each year.

In summary, an independent audit is an additional mandatory expense for those plans defined as a “large plan” by the Department of Labor. It is going to take time for your employees who are involved with personnel, payroll, and/or your retirement plan to compile the information necessary for your independent auditors to perform the audit. Don’t be caught by surprise at the last minute or the results could amount to employee anguish and hefty Department of Labor late filing penalties.

Anna M. Hunter, CPA, QPA, CPC (ahunter@wittmares.com) Senior Accountant