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I would file a 2016 as not final and with an asset amount equal to the returned check (i.e., it's a receivable).

Yep, that is exactly how I would do it. You know it is coming back, so at the end of the year it is a receivable.

This has to do with the required procedures for the auditor rather than the plan requirements that we work with. I am not intimately familiar with the ever changing requirements of the auditing process, but I do work with many different auditing firms so my "knowledge" here comes from what they have explained to me. As I understand it, the auditor must take steps to be reasonably certain that the numbers they use are accurate. For example, I just had a plan that is 15 years old go through a first audit last year. They went back three years to establish the beginning balances. The most I had ever seen before that was two years. I asked around and the answer I was given by this firm (and other firms) was that three years was good sample for this plan and barring any issues, they can use those three years to establish the beginning balances. They found no issues in the past three years and were fine with relying on my numbers to establish the beginning balances. It seems reasonable that they cannot use those numbers if they have reason to believe that the numbers are inaccurate. In your case, they have found a lot of issues in the current year and the past three years. The auditor therefore cannot rely on those numbers without going further back. What sticks to me here is that from your original post, it does not sound like the auditor is requiring the correction process to play out before issuing the audit, rather they insist on the errors/failures being quantified. To me this is a big difference.

First, hire a good ERISA attorney that can complete the VCP & the VFCP. Second file the Form 5500 without the Auditor's opinion but include a statement describing the holdup. Three, make a rough estimate of the receivable that is due to the plan and give a copy to the auditors. Four, ask the auditors to issue a disclaimer opinion because they are unable to audit the beginning balances. Five, consider firing and or suing the auditors (how many plans do they audit each year). Six, complete all the work deemed necessary by the ERISA attorney to correct the operational errors. Seven, good luck. On 403(b) plans the DOL has ruled that they would accept this wording for 403(b) plans. Auditor suggested wording In addition, the Plan has not maintained sufficient accounting records and supporting documents relating to annuity and custodial accounts issued to current and former employees prior to January 1, 2009. Accordingly, we were unable to apply auditing procedures sufficiently to determine the extent to which the financial statements may have been affected by these conditions. Because we were not able to apply auditing procedures to satisfy ourselves as to the appropriateness and completeness of the Plan’s net assets available for benefits as of December 31, 2009 and 2008, and the changes in net assets available for benefits for the year ended December 31, 2009, as described in the third paragraph above, and because of the significance of the information in the financial statements related to the Plan’s investments that we did not audit as described in the second paragraph above, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying financial statements and supplemental schedules taken as a whole.

I doubt an IRS auditor who works from home is able to adequately safeguard the personably identifiable financial information for all of the employees whose data is included in the records and information the auditor is requiring the plan to provide. Given the sensitivity of the information and the current regulatory landscape with respect to the disclosure - whether intentional or unintentional - of private data, an aggrieved participant could argue that the company had a duty - as both the employer and a named fiduciary - to act in the best interest of participants by safeguarding the data. Unless the SSNs, DOBs, addresses, etc., are redacted from the records, faxing them to an IRS auditor's home office - or mailing them there - is not taking due care.

To the OP: is it worth it to try to find a new auditor who would file a "provisional" audit and amend once everything is corrected? The current auditor is holding the plan hostage, causing (potentially) thousands of dollars in fines. Don't the auditors know that a VCP filing takes a long time to complete?

Even if the plan is SH, you can match at any rate you want, provided all the testing is passed: ACP, deductibility, 415.