Accountant's Opinion

[Guest Lex]

A Company sponsors a 401k and a Money Purchase Plan. They are both calendar yr. plans. The MP is merged into the 401k on 7/31/02. We are preparing a final form 5500 for the MP. Is an accontant's opinion required for the MP as this is a short plan year? (We will have an opinion on the 401k)

Thanks

[Mike Preston]

Regulation 2520.104-50 is the official guidance on this issue. Unfortunately, it doesn't lay out a particularly logical pattern in the case of a plan that is merged into another plan in a circumstance as you define.

You would have to get your accountants that will do the audit of the resulting plan to agree that they could rely on this regulation and therefore issue an opinion that incorporates both plans' financial results for the first 7 months of the year and the merged plan for the final 5 months of the year.

I think they could, but I'm not an accountant.

[E as in ERISA]

The accountant's opinion is always required for a plan with more than 100 participants at the beginning of the year. The rule on short plan years of less than seven months merely allows a possible delay in the timing of the report for that seven months (or the period preceding it). There would be extra columns on the financial statements to include the multiple periods covered. And the accountant's opinion would cover the period ended July 31, 2002. And the auditors would perform all the necessary testing for that period. I think you need an audit done for the MP plan by February, 2003 or 2-1/2 months later, if extended. (I don't think that auditors would combine the report for the MP short plan year with the report 401k full plan year).

[Mike Preston]

I thought it was 7 months or less, not less than 7 months?

Certainly the regulation contemplates the concept of a short plan year brought about by merger. Unfortunately, it isn't precise as to what successive plan years are. Is the 12 month plan year ending 12/31 of the year that includes the 7 month plan year ending when the plans are merged one that counts? I just don't know.

[E as in ERISA]

"Seven months or less" is correct. I was too focused on correcting the conclusion that no audit is needed -- since one appears to be needed and soon. So I stated the "seven months" rule wrong.

It is my understanding that the MP would be assumed to have a plan year ending 7/31/2003 even though it is technically continuing in existence as part of the 401k plan. I think that the DOL has made that clear based on its discussions about plan mergers taking effect on January 1. In those cases, it has indicated that an audit and 5500 are due for that one day plan year (although I think that informally they had backed off on that recently).

[Mike Preston]

Thanks. I hope that my prior message wasn't interpreted as implying that no audit was required for the MP for the period 1/1 through 7/31. Certainly an audit is required. The question is whether a _separate_ audit is required for the MP plan. I still think that the regulation cited should allow an accountant that is so inclined to do one audit for the 12 month period, iincluding the results of the MP plan for the first 7 months of the calendar year along with the results of the full 12 month year of the surviving plan.

[E as in ERISA]

No matter what the circumstances, the regulation primarily only affects the timing of the audit not the number of audits. In circumstances to which the regulation applies, the auditor can simulataneously perform both the short year and the full year audit. And the auditor can put them both in the same report. But the bulk of the work is in the testing and they still have to do separate testing for both years. So the economies of scale are limited.

[Mike Preston]

True, but the timing of the audit is somewhat critical. The 7/31 plan year will have its 5500 due on 2/28, a scant 2 months after the end of the full calendar year. Even on extension it is due 5/15 a full 5 months before the due date of the calendar year's return (with extension). With this exception, the audit for the 7 month plan year can be performeed with the audit for the 12 month plan year and attached to the 12 month plan year end's 5500, which may not be filed until 10/15/xx+1. Whenever I have run into one of these, the fact that the auditing of the 7 month plan year can be coincident with the auditing of the 12 month plan year has resulted in measurable, although certainly not earth shattering, savings.