Serving as the administrator of a 403(b) plan is no simple task, and auditing is just one of the many complex duties required. An audit can help ensure the correct amount of money will be available to pay the benefits to the participants while simultaneously keeping the plan sponsor honest regarding the finances of the company.
Over the past few years, the IRS has significantly modified regulations for ERISA 403(b) plans and they will be subject to several additional requirements, including full Form 5500 reporting and financial statement audits for large plan filers.
With modifications in requirements, it’s important to determine whether or not your plan requires an audit. The following are a few guidelines to help you evaluate your eligibility:
Eligible Participants
ERISA-covered 403(b) plans with 100 or more eligible participants are typically required to file an audit. If your business has fewer than 100 eligible participants, you may be eligible to use abbreviated reporting forms without audited financial statements.
There are three categories of eligible participants — employees who are actively contributing to their plan, employees who are eligible for the plan but have not yet enrolled or who have declined contribution, and former employees (be they retired, terminated, or deceased) who have a remaining balance in the plan.
The 80-120 Participant Rule
Although the general rule requires audits for plans with 100 or more participants, there is one exception that may lift the required audit — the 80-120 Participant. This exception allows plans with between 80-120 participants at the beginning of the plan year to file form 5500 in the same category they had in the previous year. For example, if your plan has 110 eligible participants at the start of this plan year, but only had 90 participants at the start of last year, you could file as a small plan with no audit required.
Limited Scope vs. Full Scope Audit
For the plans that do require an audit, determining what type of audit your plan needs will depend on your plan administrator. The plan administrator has the option to request a limited scope audit or a full scope audit performed on your plan.
A full scope audit is exactly like it sounds — the auditors audit everything in the plan including but not limited to loan processing, distributions, eligibility, employer contributions, employee contributions, participant data, and allocation to participant accounts. They audit everything on the plan because certification from the custodian on the investments held is not available.
For a limited scope audit, the auditor does not audit the investment values and investment earnings. However, to be eligible for a limited scope audit, the investment information must be certified by a qualified bank, an insurance carrier, or a similar institution for both completeness and accuracy. Once one of these institutions certifies the information, the Department of Labor will accept a limited scope audit. The auditors rely on this certified information to complete the necessary work. A limited scope audit is often less expensive than a full scope audit, but the price will not significantly drop due to the fact that the main focus of a retirement plan audit is the participant balances.
Next Steps
If your plan does require an audit, you’ll next want to identify an independent audit firm that meets your requirements and that can file the specific audit required for your 403(b) plan. In our next blog, we’ll share tips on how you can find an audit firm.
Understanding these eligibility guidelines can be complicated. If you’d like more information or guidance on audits for 403(b) plans, we’d be happy to meet with you. Give our office a call at (312) 973-4911 or email us at mark.olsen@planpilot.com.
About Mark
Mark Olsen is a Senior Consultant at PlanPilot, an independent retirement plan consulting firm headquartered in Chicago. PlanPilot delivers comprehensive retirement plan advisory services to 401(k) and 403(b) plan sponsors. Drawing on over two decades of experience, Mark provides institutional retirement plan consulting to 401(k), 403(b) and defined benefit plans. His specialties include plan governance, investment searches, investment monitoring and plan oversight. Mark is recognized as a leader within the industry and speaks at national conferences including Pensions & Investments, Stable Value Investment Association, and CUPAHR.