The Employee Retirement Security Act (ERISA) established in 1974 is a federal law that protects the assets of millions of Americans so that funds placed in retirement plans during their working years will be there when they retire. To enforce this protection, employee benefit plans are required to submit annual reports and, in some cases, audited financial statements. Learn more about whether your plan is required to be audited below.

What Is Form 5500?
Form 5500 is the annual reporting requirement administered by the Department of Labor (DOL) for employee benefit plans, pension benefit plans and welfare benefit plans. If your plan is considered “small,” you may be eligible to file the Form 5500-SF (Short Form) instead. Regardless of whether your plan will be audited or not, Form 5500 is required annually.

Does Your Employee Benefit Plan Need an Audit?
The requirement to have an employee benefit plan audited is based on the number of eligible participants in your plan on the first day of the plan year. If your total number of eligible participants reaches 100 on the first day of the plan year, the plan is considered “large” and generally is required to be audited. If your plan has fewer than 100 participants, it is considered “small” and no audit is required.

Who is Considered an Eligible Participant?
Eligible participants include active participants and inactive participants receiving benefits or entitled to receiving benefits in the future. However, there’s some important fine print that shouldn’t be missed — employees are considered active participants as soon as they have satisfied the plan’s specific eligibility requirements. Even if an employee has not enrolled in your plan, yet is eligible to participate, the employee is considered an active participant for determining whether the plan meets the large or small plan criteria.

Exceptions to the Audit Requirement
If you find yourself in a position where your employee benefit plan needs an audit, there may be some relief offered by one of the two following exceptions.

Short Plan Year Rule
If your plan would qualify as a large plan but its current or prior plan year is seven months or less, an election can be made to defer your audit requirement for the following year. However, in the following year, even if the plan qualifies as small, you’ll still be required to have the plan audited for that year.

The 80-120 Participant Rule If the number of eligible participants in your plan in the current year is between 80 and 120 and you filed Form 5500 for the plan’s prior year, you may elect to be considered the same plan type (large or small) for the current year as was filed for the prior year.

For example, if the number of participants at the beginning of the plan year is 115 and a Form 5500-SF was filed in the previous year as a small plan, you may elect to continue to file the short form and forego your audit requirement. However, if the number of participants is 121 (above the 120 threshold), the plan requires an audit, regardless if your plan category was considered small the previous year.

The Importance of an Audit While you may consider an employee benefit plan audit as simply a compliance requirement, there are many other advantages to having audited financial statements for your plan. An audit provides an independent, third-party report to participants, plan management and the DOL that helps protect the financial integrity of your plan and ensures funds are maintained to pay future retirement, health and other promised benefits to its participants.

Additionally, an audit may help you more effectively and efficiently manage your employee benefit plan. To learn more about your requirements and what the scope of an employee benefit plan audit looks like, contact us today.