Most qualified retirement plans that are considered ‘Large Plans’ (generally plans that cover 100 or more participants as of the beginning of the plan year) are required to engage an independent qualified public accountant (IQPA) to audit the plan’s books and records each year. The audit is filed with the plan’s annual Form 5500.
Small Plans (i.e., not Large Plans or One-Participant Plans – see One-Participant Plans defined here) are also required to obtain an audit, unless they meet the following conditions (summarized from 29 CFR 2520.104-46):
(1) at least 95% of plan assets were “Qualifying Plan Assets”, or, if less than 95% are Qualifying Plan Assets, then any person who handles assets of a plan that do not constitute “Qualifying Plan Assets” must be bonded in an amount at least equal to the value of the “Non-Qualifying Plan Assets” he or she handles;
(2) the plan includes (among other required items) the audit waiver disclosure in the Summary Annual Report or other appropriate document (e.g., the Annual Funding Notice) furnished to participants and beneficiaries in accordance with 29 CFR 2520.104b-10; and
(3) in response to a request from any participant or beneficiary, the plan administrator must furnish without charge copies of statements from the regulated financial institutions holding or issuing the plan’s “Qualifying Plan Assets.”
Qualifying Plan Assets are:
- Any asset held by certain regulated financial institutions (see next section);
- Shares issued by an investment company registered under the Investment Company Act of 1940 (e.g. mutual fund shares);
- Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state;
- In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution describing the plan assets held or issued by the institution and the amount of such assets;
- Qualifying employer securities, as defined in ERISA section 407(d)(5); and
- Participant loans meeting the requirements of ERISA section 408(b)(1), whether or not they have been deemed distributed.
Only the following institutions are “regulated financial institutions” for purposes of the small pension plan audit waiver conditions:
- Banks or similar financial institutions, including trust companies, savings and loan associations, domestic building and loan associations, and credit unions.
- Insurance companies qualified to do business under the laws of a state;
- Organizations registered as broker-dealers under the Securities Exchange Act of 1934;
- Investment companies registered under the Investment Company Act of 1940; or
- Any other organization authorized to act as a trustee for individual retirement accounts under Internal Revenue Code section 408.
A plan’s ERISA §412 bond coverage is considered in determining whether or not Non-Qualifying Plan Assets are appropriately bonded to meet the small pension plan audit exemption. An ERISA §412 bond must generally cover 10% of plan assets, but not less than $1,000 or more than $500,000 (assuming the plan does not invest in employer securities). If Non-Qualifying Plan Assets are greater than the plan’s ERISA §412 bond coverage, an increase in coverage or an additional bond must be secured. As a practical matter, some insurance companies will not insure Non-Qualifying Plan Assets, so before you make such investments, be sure to review your policy.
Sources / Additional Resources:
http://www.dol.gov/ebsa/faqs/faq_auditwaiver.html (includes model Summary Annual Report and Small Pension Plan Audit Waiver decision tree)
http://www.dol.gov/ebsa/regs/fab2008-4.html (discusses ERISA §412 bonding in detail)
Stephanie L. B. Terry is a senior manager with Pinnacle Plan Design, LLC.