The first step in determining if your pension plan might need to be audited is in understanding the concepts of large plans and small plans. A large plan is a plan with 100 or more participants on the first day of the plan year and a small plan has fewer than 100 participants. Why does this matter? A large plan must file Form 5500 with the DOL, but a small plan may be able to file Form 5500-SF. Whether a plan is considered to be “large” or “small” also affects the other schedules that must be filed with their Form 5500. One of the requirements with filing Form 5500 by a large plan is that an accountant’s report on audited financial statement of the plan must be attached with the annual filing.
The Department of Labor (DOL) acknowledged that a hard fast rule such as this may have some plans filing as a large plan one year and a small plan the next year, basically going back and forth from needing an audit to not needing an audit. Therefore, the DOL provides an exception to this rule that can be used by plans that fluctuate around the 100 participant count. The regulation provides that plans with between 80 and 120 participants at the beginning of the current plan year can elect to file their current year return using the same category they used the previous year, either as a large plan or a small plan. Once a plan reaches a participant count of 121 on the first day of the plan year, it must file as a large plan and continue to file as a large plan until the participant count drops below 100.
The second step in this process is to be sure you have the participant count correct. So who is considered a participant? In general terms, a participant is anyone who is eligible to participate in the plan. This includes individuals even if they do not choose to participate and have no account balance in the plan but they have met the requirements to participate in the plan. It also includes active participants (currently employed by the plan sponsor), retired or separated participants receiving a current benefit, retired or separated participants entitled to a future benefit, and deceased individuals who had one or more beneficiaries entitled to receive benefits.
There are other rules to be considered in evaluating whether your plan needs an audit or not, so it is best to be consulting with your third party administrator and your accountant to ensure you complete and file the correct Form 5500 with all required schedules and attachments.