Retirement Plan Consultant
Cetera Retirement Plan Specialists
Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
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|Question 323: What is the effect of the recent Advisory Opinion on audits for open MEPs?|
Answer: Advisory Opinion 2012-04A (herein referred to as the "Opinion"), by determining that the underlying employers of an open MEPs have each established separate ERISA plans, effectively subjects each of those plans separately to ERISA’s audit requirements. The way those audit requirements apply is determined at the individual ERISA plan level, not at the MEP level.
The DOL settled this point nearly 30 years ago in Advisory Opinion 83-21A, ruling that a United Way and certain “affiliated agencies” had established separate ERISA plans. The DOL ruled that an insufficient “organizational nexus” appeared between the plan sponsors for it to be a single ERISA plan. At the time, there was no requirement for small plans (under 100 participants) to be audited, under any circumstances. The DOL determined that because no employer sponsoring the MEP had at least 100 participants, there was no audit requirement for the MEP. In other words, the 100 participant threshold is applied at the level of the employer.
In Q&A 321, I suggested that the MEP itself file as a DFE, as a 103-12 IE. If it chooses to do so, the filing must be audited by an independent qualified public accountant. See DOL Reg. § 2520.103-12(b)(2) and Form 5500 instructions.
Large Employer Plan Filing
When an employer adopts a MEP with more than 99 participants, the Form 5500 for that employer is subject to the audit requirements. So, every large underlying plan must be audited. But DOL Reg. § 2520.103-12(d) states that the plan audits “need not extend to any information concerning an entity which is reported directly to” the DOL as a 103-12 IE. In other words, for this situation, the individual plan audit does not have to include anything addressed in the MEP audit. This should vastly simplify, and hopefully reduce the costs of, the audits for the large plans.
There are still things to include in the audits for the underlying large plans. For example, auditors are instructed to look specifically at the answer to question 4a on Schedule H, asking whether the employer was late in depositing deferrals. That answer applies at the individual employer level. I assume that reporting of deemed distributions of participant loans (and thus the loans themselves) would also be handled at the level of the underlying plan.
Small Plan Filing
Plans with fewer than 100 participants are exempt from the audit requirements if at least 95% of the plan assets are “qualifying” or there is a bond in at least the amount of the nonqualifying assets. Frequently, there must be an enhanced summary annual report and additional information must be available at participant request. See 2011 Form 5500 Instructions, pages 48 and 49.
One type of qualifying asset for a defined contribution plan are assets held in a participant-directed account for which the participant receives a statement from a regulated financial institution at least annually. Participant loans satisfying the prohibited transaction exemption requirements are also qualifying. That describes most of the assets in open MEPs, I believe. The advantage to having all plan assets fall under those categories is that there is no need for an enhanced summary annual report.
For the situations in which the MEP holds other assets, the underlying small plans will need to comply with the enhanced summary annual report and information availability requirements.
Often, when we speak of audits of Form 5500, we refer to the types of audits we’ve been discussing, with an independent auditor examining and certifying the return. But there’s another type of audit to consider: the IRS audit. The IRS has audit selection criteria, but it doesn't release them to the public. So, from the practitioner’s standpoint, the odds of an IRS audit is a matter of probabilities.
Suppose the IRS audits only 0.5% of retirement plan 5500s. For most plans, that means that the odds you would not be audited in a year are 99.5%. But look at the odds from the standpoint of an open MEP which now prepares and files 500 Forms 5500. The odds that every one of those individual returns will escape audit for a given year is only 8.2%. In other words, the odds that at least one of those 500 returns will be selected for audit is 91.8%. And because the MEP is a single plan from the IRS standpoint, to subject one return to an IRS audit potentially subjects the entire MEP to an audit.
Based on 2008 data, I suspect the 0.5% in my example is low. That year the actual number of returns audited was closer to 1%, according to the 2010 IRS Data Book. If the odds of an individual audit are 1 in 100, then the likelihood that at least one of the 500 Forms 5500 from the MEP being selected for audit in a given year approaches certainty: 99.3%.
To MEP organizers, the message should be clear: Not only is the DOL watching for fiduciary and prohibited transaction issues, but in addition the IRS will be able to monitor qualification issues with greater frequency than it ever has before.
For further discussion of the qualification issues related to MEPs in general, see Chapter 18 of the new 6th Edition of my book, Who's the Employer. For a comparison of the Code and ERISA issues relating to open MEPs, see my article, Multiple Employer Plans: An ERISA Enigma, appearing in the Winter 2012 issue of the Journal of Pension Benefits (Vol. 19, No. 2, p. 6).
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.