Proposed Conditions for Small Pension Plans to Continue to Avoid Annua

[Dave Baker]

[*Thanks* to Sal Tripodi of TRI Pension

Services, for permission to reprint and edit the

following article, which appears on his site

today at http://cyberisa.com. TRI Pension

Services, started in 1994, is committed to

providing consulting, professional training, and

reference material in ERISA-related subjects.]

Current DOL regs exempt "small" pension plans from

the annual audit requirement that applies to larger

plans (i.e., engaging an independent qualified

public accountant to examine the financial

statements of the plan and to issue a report to be

attached to the Form 5500). A "small" plan is one

that has fewer than 100 participants at the

beginning of the plan year (or has between 100 and

120 participants and elects to be treated as a

small plan).

Proposed regulations issued today would require

small pension plans (e.g., profit sharing plans,

401(k) plans, money purchase plans, or defined

benefit plans) to meet certain conditions in order

to be exempt from the annual audit requirement.

Small pension plans that cannot meet these

conditions would have to engage an accountant to

audit the plan each year and attach the

accountant's report to the plan's Form 5500.

The regulations are proposed to become effective 60

days after they have been finalized, and would

pertain to plan years that begin after the

effective date.

Small welfare benefit plans would not be subject to

these new rules, and would continue to be exempt

from the audit requirement without any of the new

conditions.

To be exempt from the audit requirement, a small

pension plan would have to:

(1) have at least 95% of its assets invested in

"qualifying" plan assets, or

(2) obtain a bond for any person who handles

assets that do not constitute qualifying plan

assets, in an amount that is not less than the

value of such assets.

Qualifying plan assets are:

- qualifying employer securities,

- participant loans which meet the prohibited

transaction exemption requirements,

- assets held by a bank or similar financial

institution, as defined in DOL regs,

- assets held by an insurance company,

- assets held by a registered broker-dealer, or

- assets held by an organization that is

authorized to act as a trustee of IRAs.

In addition to meeting one of the two requirements

described above, the summary annual report would

have to include:

(1) information about the name of each

institution holding qualifying plan assets and the

amount of such assets held by such institution as

of the end of the plan year,

(2) if applicable, information about the surety

company issuing the bond described above,

(3) a notice that the participants and

beneficiaries may request a copy without charge of

any such bond and statements received from each

institution holding qualifying plan assets that

describe the assets held by the institution as of

the end of the plan year, and

(4) a notice that the participants and

beneficiaries should contact the DOL's Pension and

Welfare Benefits Administration if they are unable

to examine or obtain copies of these items.

The DOL believes this regulation would increase the

security of assets in small plans, by conditioning

the waiver of the audit requirement on enhanced

disclosure of information to participants and

beneficiaries, and, if the plan invests more than

5% of its assets in nonqualifying plan assets, by

strengthening the bonding requirement.

Written comments on the proposed regulation must be

received by the DOL by January 30 of next year.

A reprint of the full text of the proposed

regulation appears online at

http://www.benefitslink.com/erisaregs/audit

[This message has been edited by Dave Baker (edited 12-01-1999).]

[Dawn Hafner]

Can anyone come up with some assets that won't fit into the qualifying plan asset definition? If a limited partnership is held in a brokerage account wouldn't that still meet the requirement? Even plans that manage their investments internally would have the assets held at a financial institution in trust. I am having a hard time coming up with any examples of how a plan could fall into this category. Any examples?

[Ervin Barham]

Except for a few wild and crazy ones, most plans I see should be able to meet one of the guidelines. However, I am particularly

concerned with having to list financial institutions and assets on the SAR. This is no big deal for a plan with assets at one brokerage house, insurance company or bank. A lot of the smaller plans have assets at several, particularly those with segregated accounts. It adds a lot of cost to the admin fees without a whole lot of value. I also think small employers are going to balk at this and the potential for releasing asset statements, since it's too easy for participants to figure out how much is in the owner's account.

Administrators already have enough to do with useless government paperwork. Let's not add more!

Maybe I've missed the boat. I'd be interested in hearing why these new guidelines are a good idea or if my concerns are unjustified.

[Guest Malou]

Some examples of plan assets that would not fit into the "qualifying" assets would be: Real Estate, collectibles, stock in a privately-held company (but not one subject to prohibited transation rules). For most plans, this may not be a major event, but in some cases it could make things rather difficult for the plan sponsor.

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