New plan audit question

[Guest Hgreer]

Have a plan that began in February of 2013. They are just a tad over 100 eligible participants. The IRS website says that "Pension plans with fewer than 100 participants at the beginning of the plan year are eligible for a wavier if they meet the conditions for an audit waiver under 29 CFR." Then right below that it also says "Under the 80 to 120 Participant Rule, if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan." The plan did not file in the previous year so does that mean that an audit is required or do you still get a waiver because you have not crossed the 120 participant threshold? A little confusing any direction is greatly appreciated.

Thanks,

Hal

[Lou S.]

You don't get the window. 1st year plan over 100 is required to get an audit.

The 120 is only is you were previously a small plan.

[My 2 cents]

As I understand the rule, if the participant count is between 80 and 120, you get to continue filing the same way as in the prior year. No prior year = straight up decision based on under 100 or over 100. The 80-120 rule is an exception (that would not appear to apply here). Similarly, if had been over 120 but has fallen to 105, you don't get to switch just because you are between 80 and 120. You only get to switch from large plan to small plan if you actually go below 100. Similarly, if you were below 100 and then have been filing small because you had not grown to 120, once you do rise to 120, you have to file large until fall below 100 again.

[BG5150]

And if you have been filing as a large plan and you go to 80 or less, you cannot still file as a large plan. (And why would you want to? )

[Guest Hgreer]

Thanks guys - very helpful. It is what I figured but was not 100% clear.

[Flyboyjohn]

Snide comment follows: Sounds like 2013 (and possible a few more years) audit could have been easily avoided with a little attention to this issue at the time the plan was implemented. Based on the costs of audits in our area you could be talking about a $10,000- $20,000 "error". Hal, if someone other than you was responsible for plan design is there any potential liability to be explored?

[david rigby]

Well......

there still might be time to fix this, possibly by creating 2 plans instead of 1.

[My 2 cents]

Where is there any sort of actionable error? Presumably, the plan covered people eligible to be covered (and intended to be covered) and otherwise met all of the requirements for a qualified plan. Is there a legal responsibility to avoid a straightforward, legitimate approach to plan design if it results in having to file an auditor's report, which is not something that was inadvertantly written into the plan document but arises from an outside, legal requirement.

Wouldn't splitting it into two plans possibly lead to later problems (such as 401(a)(26) or other compliance issues) that would not easily arise with a single plan?

Is the sponsor growing, staying the same size, or shrinking? One presumes that if a plan is being instituted, growth is the more likely trend. If they set up two plans and then grew enough, they might, in a few years have to get two auditor's reports!

[ESOP Guy]

Where is there any sort of actionable error? Presumably, the plan covered people eligible to be covered (and intended to be covered) and otherwise met all of the requirements for a qualified plan. Is there a legal responsibility to avoid a straightforward, legitimate approach to plan design if it results in having to file an auditor's report, which is not something that was inadvertantly written into the plan document but arises from an outside, legal requirement.

Wouldn't splitting it into two plans possibly lead to later problems (such as 401(a)(26) or other compliance issues) that would not easily arise with a single plan?

Is the sponsor growing, staying the same size, or shrinking? One presumes that if a plan is being instituted, growth is the more likely trend. If they set up two plans and then grew enough, they might, in a few years have to get two auditor's reports!

Wouldn't have been possible to have written so the plan is effective the 1/1 and no one enters until the day the plan was signed in 2/2013?

Strictly speaking then isn't there zero employees on the first day of the plan year?

I know I have seen the opposite sneak up on plan sponsors. They sign a plan in December making the plan effective 1/1 and allow anyone hired in the first year to enter 1/1 or their hire date in in that year. They now have over 100 people the first year and have to get an audit.

Having said that I am not sure that is actionable as all these ideas are rather discretionary.

I will be the first one to admit I don't think about this too much. Most of the plans I work with are so far over 100 or 120 at most you would save the first year audit. After that it would be clear you have to get an audit.

[chc93]

And if you have been filing as a large plan and you go to 80 or less, you cannot still file as a large plan. (And why would you want to? )

We had a plan once that fell below 100... but the sponsor actually wanted the plan audit, since it was "independent" and gave him some comfort that someone else was looking at the plan... even with the cost involved.

[Flyboyjohn]

The actionable error was not disclosing to the sponsor that under their chosen eligibility provisions they would incur substantial cost that could be avoided by a few minor tweaks to plan design (slightly lenghtening the eligibility waiting period if not at the max, excluding a small group of employees not likely to contribute, etc.), based on the facts appears no 2nd plan would be needed.

Then, after disclosure, if the sponsor choose to go the audit route so be it. IMHO this is malpractice per se but I'm sure the platform provider, financial advisor and TPA (if there was one at the table) disclaimed all responsibility for everything.

Those rare sponsors of relatively small plans who think they're getting something of value from the plan audit have my deepest sympathies.

Sorry about the rant.

[My 2 cents]

And if you have been filing as a large plan and you go to 80 or less, you cannot still file as a large plan. (And why would you want to? )

We had a plan once that fell below 100... but the sponsor actually wanted the plan audit, since it was "independent" and gave him some comfort that someone else was looking at the plan... even with the cost involved.

Fall below 100 but stay above 80 and you can (if you want) continue to submit large plan filings with an attached audit. Fall below 80 and you cannot.

DOL expense question: Assuming that there is nothing to prevent a sponsor of a plan below 80 people from obtaining a plan audit, even if not required for the 5500 filing, would the plan be able to pay for the audit (as is generally the case for audits needed by large plans, assuming supported by plan language)? The irrefutable argument for the large plans paying for their audits is that it is required for the 5500 filing. What about an audit for a plan too small to file as a large plan?

[Bill Presson]

And if you have been filing as a large plan and you go to 80 or less, you cannot still file as a large plan. (And why would you want to? )

We had a plan once that fell below 100... but the sponsor actually wanted the plan audit, since it was "independent" and gave him some comfort that someone else was looking at the plan... even with the cost involved.

We had that once as well. We still filed as a small plan, but the sponsor paid for the audit and just kept it in the desk. After 3 years of paying for an audit that wasn't required, we convinced them to save the money.

[austin3515]

but even for a new plan, the audit is determined on the first day of the Plan year, correct?  I know I'm thinking top-heavy rules here, but thought I would check!

As an aside, they could have waived eligiblity for anyone employed on 1/2nd!

[Bill Presson]

5 hours ago, austin3515 said:

but even for a new plan, the audit is determined on the first day of the Plan year, correct?  I know I'm thinking top-heavy rules here, but thought I would check!

As an aside, they could have waived eligiblity for anyone employed on 1/2nd!

Correct, it's determined on the first day of the plan year. For a new plan, though, if there are more than 100 participants, it needs an audit. The 80/120 rule doesn't apply.