Look out, little guys

Business owners beware.

In the past, only large retirement plans with 100 or more participants required an audit by an independent accountant. But new rules require all plans to include an audit report with their returns unless they meet specific guidelines.

The requirement was extended to protect participants in smaller plans from fiduciaries’ illegal activities and safeguard the extraordinary assets that have accumulated in small plans over the past 25 years.

These audits can be costly. Knowing the expense associated with a plan audit — and realizing it may discourage smaller employers from implementing qualified plans — the Department of Labor (DOL) has issued specific guidelines smaller plans can follow to avoid the audit requirement. Plans with 100 or more participants remain subject to existing audit requirements.

A small plan that meets the requirements can exempt itself, but the new requirements can be confusing. Here are some of the basics.


Qualifying plan assets

At least 95 percent of plan assets must constitute qualifying plan assets. Qualifying plan assets include qualifying employer securities; shares issued by a registered investment company (such as a mutual fund); assets held by an insurer, bank or registered broker-dealer; participant loans; investment and annuity contracts; and assets in personal brokerage accounts that receive statements from a registered financial institution at least once a year.

For example, suppose a plan is invested in 24 percent government bonds, 65 percent mutual funds, 5 percent annuity contracts and 6 percent limited partnerships. Because limited partnerships aren’t considered qualifying plan assets, only 94 percent of the assets meet the definition of qualifying plan assets; therefore, this plan must have an audit.


Bonding requirements

Any person handling nonqualified plan assets must be bonded for at least the nonqualified assets’ value.

All qualified plans are subject to a minimum bonding requirement of 10 percent of plan assets up to $500,000. The bond must cover any person authorized to transact business on the plan’s behalf.

The bond’s intent is to protect the plan from loss because of a plan fiduciary’s fraud or dishonesty. The new bonding requirements for small plans are not in addition to the traditional 10 percent requirement.

For example, say a plan includes 25 percent non-qualifying assets. It would have to obtain 15 percent additional bonding to equal the total bond level of the percentage of the plan’s nonqualifying assets.


Summary annual report

In your summary annual report, include additional detailed information and distribute it to participants annually.

Previously, the report’s content was mostly a summary of the information on the IRS Form 5500. Now you must include four additional items to avoid a small-plan audit:


* The name of each financial institution holding or issuing qualifying plan assets and the value of the assets issued as of the plan’s year end


* The name of the surety company issuing the bond if more than 5 percent of the plan assets are nonqualifying assets


* A notice telling participants they may ask for a free copy of evidence of the required bond and copies of statements from the financial institutions describing the qualifying plan assets


* A statement informing participants and beneficiaries that they should contact their regional U.S. DOL office if they are unable to obtain any of the information required to be provided under the summary annual report


Audit report

So what is an audit report? It’s a comprehensive review of various aspects of a plan, such as participant data, deferral elections, investment elections, eligibility, vesting, distributions, loans and financial information associated with the qualified plan.

An accountant analyzes these items to develop an opinion of the plan. This opinion, along with accompanying financial statements and disclosures, makes up an audit report. You must include a complete report with IRS Form 5500 that you file with the DOL annually.

Because each plan has its own unique factors, the cost of this type of audit can vary significantly based on the plan’s complexity. A typical plan audit runs anywhere from $5,000 to $10,000 per year on average, although some plans may cost considerably more and others slightly less.


Bill Barks is director of the employee benefits area of Heaton & Eadie, which provides accounting and management consulting services to clients in the middle market. Reach him at www.heatonandeadie.com, (317) 581-9000 or [email protected].