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Does my Retirement Plan Really Need an Audit?

March 02, 2023

Typically, new plans with over 100 eligible participants on the first day of the Plan year need an audit…but what about existing plans? We shed light on what triggers an audit here.

Recently we were engaged by a retirement plan that needed an audit for the first time. The Plan had been in existence for a few years when the third-party administrator contacted the Plan Administrator to say that the Plan would need an audit with this year’s Form 5500 filing. In a panic, we received a call from the Plan Administrator who called to ask for clarification on the audit requirements.

Our response was that typically new plans with over 100 eligible participants on the first day of the Plan year need an audit and existing plans with over 120 eligible participants on the first day of the plan year are required to be audited. How can an audit be required if the Company only has 90 employees? The answer lies in the definition of “eligible participants.”

The most common eligible participants include the following:

  • Active participants - current employees who are participating in the Plan either through salary deferrals or employer contributions
  • Retirees - former employees who are retired and receiving benefits under the Plan
  • Beneficiaries of deceased participants - beneficiaries currently receiving benefits or entitled to receive benefits in the future
  • Separated Participants entitled to receive benefits in the future - terminated employees who have balances in the Plan

Involuntary cash-outs—what you should know

Many Plan Administrators do not realize that allowing former employees to keep their balances in the Plan after separation may in fact cause the Plan to incur fees from the custodian and trigger the need for an audit. If your Plan document has an involuntary cash-out provision, you should revisit it and see if your Plan is complying with this provision.

An involuntary cash-out allows the Plan to distribute out the former employee’s vested balance to them without their written consent. If a former employee has a vested balance above the involuntary cash-out amount, you should contact them and encourage them to roll over their balance into an IRA or a new qualified plan, if they are enrolled in one.

If you are a Plan Administrator or a fiduciary of a Plan, you should review your Plan document or contact your current service providers to check on your distribution provisions and also look at your eligible participant count. By addressing this issue early on, you may be able to save the Plan or the Plan Sponsor the cost of an audit.

Questions? Contact us.

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