Does My Plan Need an Audit?

The main determining factor in whether your plan needs an audit performed by an independent qualified public accountant is the participant count. An audit will be required if the beginning of year participant count is more than 100. For the plan year that began in 2023, there is a change to how the participants are counted. Prior to this, the count included active participants—regardless of whether or not they had an account balance—as well as terminated participants who had an account balance. Now, participants without an account balance are no longer included in the count. This is exciting news because it means that some plans who required an audit for 2022 may no longer require an audit for 2023.

For plans that hover around the 100-participant mark, there is a rule in place to help stabilize the audit requirements from year to year. The 80-120 rule states that if the participant account is from 80 to 120 participants, the plan may retain the same audit status as the previous year. In practical terms, this means that an audit is not required until the participant count reaches 121. However, once an audit is required, it continues to be required until the participant count drops to 99 or less.

In addition to participant count, the type of assets held in the plan may cause the plan to require an audit, even if the participant count is under 100. Small plans are required to have an audit unless the plan fulfills the requirements of one of these exemption waivers:

  • At least 95% of the plan’s assets are qualifying plan assets. This criterion is satisfied by most small plans. Qualifying plan assets include qualifying employer securities, participant loans, shares issued by a regulated financial institution, registered mutual funds, investments and annuities issued by an insurance company, and certain assets in an individual account of a participant or beneficiary.
  • Less than 95% of the plan’s assets are qualifying, but a fidelity bond is in effect. This fidelity bond must cover 100% of the non-qualifying assets, or provide coverage based on standard ERISA bonding rules, based on whichever value is greater.

Since a large plan audit count is now based solely on individuals with an account balance, paying out your terminated participants could help to lower your participant count. It may be time to review your cash out limit, plan assets, and the account balances of terminated participants in order to minimize the need for an accountant’s audit in the future.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.