Generally, plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) with 100 or more participants at the beginning of the plan year are required to file an audit performed by an Independent Qualified Public Accountant.
Plan sponsors should carefully review the definition of a participant in order to calculate the actual participant count. ERISA Section 3(7) defines a participant as “any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan that covers employees of such employer or member of such organizations, or whose beneficiaries may be eligible to receive any such benefits.” Under Internal Revenue Code Section 401(k) qualified cash or deferral arrangements, a participant also includes individuals who are eligible to participate in the plan, whether or not the individual elects to participate.
The regulation includes two exceptions to the general rule that plans with 100 or more participants require an audit. First, if a plan has not met the audit requirement in the past, the audit requirement is triggered when the participant count reaches 121 participants at the beginning of the plan year.
Second, in order to meet the exemption for plans with under 100 or 121 participants, either (A) 95% of the plan’s assets must be “qualifying plan assets” or (B) the total amount of the non-qualifying plan assets must be covered by an ERISA Section 412 fidelity bond. “Qualifying plan assets” include employer securities, qualifying plan loans, and assets held by a wide variety of regulated financial institutions. A more detailed definition can be found in Section 2520.104-46 of the ERISA Regulations.
We have only outlined the general regulations for audits of defined benefit and defined contribution plans. Please contact Peter Tawney, Audit Principal and ERISA Audit Practice Leader, at 603-626-2260 to discussion in greater detail.