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BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Small Plan Audits and IRC 414(c)

(Posted June 21, 2003)

Question 257: I am the owner and sole employee of a corporation. I also have a sole proprietorship with no employees. Because these businesses are under common control, I must file a full Form 5500. Am I subject to the small plan audit requirements?

Answer: Mercifully, no, but you wouldn't discover that by reading the Form 5500's instructions.

You are correct that in your situation you must file a full Form 5500. If the two businesses were not under common control, you could file a Form 5500-EZ and the problem would go away, but whenever a business is aggregated with another business under 414(b), (c), or (m), the plan must file Form 5500.

So your plan must file Schedule I and thus must deal with the relatively new question about the small plan audit requirements. The instructions detail how a plan can waive those requirements. Nothing in the waiver rules seems to apply to your situation.

However, before we ask if you need to have the audit waived, we need to ask if you are subject to the audit in the first place. And the answer to that question is no. The statutory authority for the audit is ERISA section 103, which applies to "every employee benefit plan to which this part [ERISA sections 101-111] applies." DOL Reg. 2510-3 tells us that a one-participant plan, such as yours, is not subject to Title 1. So your plan is not subject to the audit requirements in the first place; the question of a waiver becomes irrelevant.

Now settle back and grab a cold beverage while I tell you a true story. I came to the above conclusion several months ago, but as I was preparing for SunGard Corbel's Form 5500 seminar this spring I decided to check to see if the government agreed with me. I called the DOL's Form 5500 help line. I was told I would have to talk to the chief accountant. I hung up and called the chief accountant. Someone from the chief accountant's office told me I'd need to speak to someone in the DOL's regulations office. I hung up and called the regulations office, leaving a message on their machine.

A couple of days later someone got back to me to show me the regulation saying that a one-participant plan is not subject to Title I (which I had stated in my phone message). I got her to understand the issue, educating her in the process on how it is that an ASG member can have a one-participant plan. She said she'd kick it upstairs to one of the folks who writes the regs and get back with me. She called back a couple of hours later to say, in effect, "We agree with you that the plan is not subject to the audit requirements as far as we're concerned. All we do is hand things off to the IRS and so we don't care whether you do an audit or not. But the IRS may care. Why don't you call them and see if they want you to file an audit?" (Incidentally, be sure to enter code 3G on line 8A of the 5500. That tells the DOL that this is an IRS-only return and the DOL should ignore you.)

So I hung up and called the IRS. I had to spend about half an hour educating the fellow there on the issues. Finally he agreed that this was above his pay grade, and he'd have someone "from Washington" call me back. I got a call 2 days later from the said Washingtonian. I was able to get him to understand the issue in less than 7 minutes. He said he'd have to check on it, and he'd call me back. The following day, he called me back and said "We'll defer to the DOL on this." I asked "Does this mean that since the DOL doesn't want the audit, you don't either?" He said in essence, "That's right. We wouldn't have anything we'd do with it."

Incidentally, rather than explain all this to the DOL when I fill out a Schedule I, I'd simply answer "Yes, the plan is entitled to the waiver." I don't expect they'd thank you for bringing up the issue again!

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1999-2017 S. Derrin Watson
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