Small plan audit waiver

[Belgarath]

Since I'm always willing to question myself on this subject, just soliciting opinions:

Suppose you have 2002 calendar year plan. As with many clients, they have just given complete data. We find that as of 12-31-2001, they fail the 95% asset test. And they have NO bond whatsoever. (Ignore for now that this is an ERISA violation in and of itself).

For purposes of qualifying for the waiver, do you interpret the rules as:

A. If they had bonded for a proper amount no later than 12-31-02, they qualify for the waiver.

B. If they bond for the proper amount no later than the time they actually file the 2002 5500 form (in 2003) they still qualify, or is it too late if they didn't do by 12-31-02?

C. If assets had been shifted in 2002, prior to 12-31-02 so that they satisfy the 95% test, is this sufficient, or does the fact that the beginning of year asset test (based on 12-31-01) failed automatically preclude them from satisfying the asset test for 2002?

Any opinions or experience with the DOL accepting (B) above, for instance, even if you are inclined to think this doesn't satisfy the rules?

Thanks.

[Lynn Campbell]

Did you mean to say the Plan failed to meet the 95% test as of 12/31/2002? I assume so, because I do not think the rules were in effect for 12/31/01 year end. I think they took effect for Plan Years beginning after April (not sure which day), 2001. If you just got the data for 2002, and obtain the bond immediately, I would say you meet the rules for the waiver. I think the intent is to get the bond as soon as administratively feasible after you know it is needed. I am ignoring the fact that this client has no bond whatsoever...I am not sure what effect that would have on your situation.

[Belgarath]

Hi Lynn - no, I did mean 12-31-01. The asset test is performed using the assets on the last day of the prior plan year. As you correctly state, being a calendar year 2002, the audit requirements didn't become effective until 2002 (effective for plan years beginning after April 18, 2001). However, they apply at the beginning of the applicable plan year. So they are effective for 1-1-2002, but you'd use 12-31-01 asset values. And you have to comply as soon as reasonably possible. Does this change any of your answer?

My own opinion is this: if you don't either reallocate assets to pass the test, or increase the bond as necessary, before the end of(in this case)2002, then you are stuck, and must get the audit. And if you could "reasonably" fix it sooner than the end of the year, then you can't wait until the end of the year. I just wondered what other folks think about this. For example, you could take a very rigid view on the assets, and say that if you fail the test in 12-31-01, then you cannot "fix" the assets in 2002, and would be forced to depend upon increasing the bond - presumably as soon a possible, but in no case later than 12-31-02. But there also may be folks who believe that if the bond is increased in 2003, that would still get you out of the audit for 2002. Hence my questions.

As a procedural issue, when we do a 2002 valuation, we have asset values for the 12-31-02 date. These are the values used to test for 95% for 2003. So we test for the 95%. If they fail, then we immediately notify client that they must increase bond (unless their 10% bond is already sufficient to cover) or reallocate assets, if they wish to avoid the audit when they file their 2003 forms.

I appreciate any feedback. Thanks.

[Blinky the 3-eyed Fish]

I take the more rigid view. My understanding is the last day of the prior plan year is the "determination date". Therefore, a bond must be obtained based on the values as of that date no matter what occurs during the plan year. Also, waiting until 12/31 might not be considered as soon as feasible.

Sign me Inflexible Igor, but your case needs an audit IMHO.

[Lynn Campbell]

This is a long shot, but can you get the bond dated effective back in mid-2002? I think that would meet the rules??

[Belgarath]

Blinky - I agree completely. First, in the particular case presented, I have no question that the audit is required. Second, I agree with your opinion on the assets. And that is actually how we do it here. I plead temporary insanity - I just do not know what I was thinking about when I wrote that second post. Taking phone questions while typing is a level of multi-tasking with which I am evidently unable to cope. But the part about soliciting opinions from others still stands, especially if anyone has specific cases where a less rigid approach has been allowed or informally "approved" by folks at the DOL. Thanks.

[Guest jashendo]

I have a client who went to the DOL (they didn't like my advice, I guess), and they were advised by the DOL (telephone) that the increased bonding requirement must be met as of the beginning of the year in question -- 1/1/2002 for you. Otherwise, no exemption.

And if you're finding this out now (which was the case with my client), there will be no exemption for 2003 either, since the bond will not have been increased as of 1/1/03.

[Blinky the 3-eyed Fish]

I think the advice they got was erroneous. If the basis of the assets is as of the last day of the prior plan year, then it would be impossible to gather that data (for nonqualifying assets no less) in time to properly determine the bond amount.