Retirement Plan Reporting Requirements | Meaden & Moore

When you started offering employees a retirement plan, your goal was likely to  attract and retain qualified employees — not to take on additional reporting and compliance responsibilities. But as your workforce grows, your plan may be subject to new or different filing and audit requirements.

Understanding these requirements can help you stay compliant with ERISA and the IRS. In this article, we’ll explain:

• What Form 5500 is and what plans need to file it
• When your retirement plan should be audited
• How the 100-participant rule determines audit requirements
• What the 80-120 rule means for your plan
• How to prepare if your plan is approaching the audit threshold

What is Form 5500, and who needs to file it?

Form 5500 is an annual information return that reports certain details about employee benefit plans — including retirement plans. In general, employers who offer an ERISA-covered retirement plan — like a 401(k), 403(b), or pension plan — are required to file this form. It asks about participant counts, financial activity, plan assets and liabilities, and details about the plan sponsor and the plan administrator.

For many employers, filing Form 5500 is already part of their annual compliance process. The bigger concern, especially for employers whose participant base has grown in recent years, is whether that retirement plan is also subject to an audit.

Which retirement plans need to be audited?

In general, large ERISA-covered retirement plans are required to obtain an independent audit and include audited financial statements with their Form 5500 filing. Small plans that satisfy applicable Department of Labor requirements are generally exempt from the audit requirement.

Small Plans and the 100 Participant Threshold

A retirement plan is considered a small plan if it has fewer than 100 participants with account balances at the beginning of the plan year. Once a plan’s participant count reaches 100, it’s considered a large plan. Large plans are required to obtain independent audits every single year and attach audited financial statements to their Form 5500 filings.

For plan years beginning on or after January 1, 2023, the Department of Labor changed the methodology for counting participants for purposes of determining whether a plan qualifies as a small or large plan. Learn more about these changes here.

This 100-participant threshold isn’t as straightforward as you might think — and how it’s counted has changed in recent years. To learn about the nuances of this rule, scroll to FAQ section that follows.

80-120 Rule

The 80-120 rule exists to ease compliance burdens on growing plans that are right at that 100-participant threshold. Rather than changing filing status every time the participant count moves slightly above or slightly below 100, plans with between 80 and 120 participants can elect to continue filing the same category as they did the previous year.

Let’s say that last year, your plan had 94 participants holding account balances. At the beginning of this year, that number jumped to 102. Form 5500 reporting rules allow you to continue filing as a small plan — which generally allows the plan to continue qualifying for the small-plan audit exemption — until your participant number surpasses 120.

Types of Audits for Large Plans

Large plans are required to commission an independent audit. There are two types of independent audits:

1. ERISA Section 103(a)(3)(C) Audit (most common)
   If your plan’s investments are held by a qualified institution (like a bank, insurance company, or brokerage company), that institution can certify your plan’s investment information. This means that your auditors won’t have to perform separate audit procedures to verify investment information, which can make the audit more efficient and less costly. Most 401(k) and pension plans fall into this category.
2. Full-Scope Audit
   If the plan's investments are not eligible for certification by a qualified institution, such as investments in employer-held real estate, private equity, or closely held business interests, the auditor must perform audit procedures on those investments as part of a full-scope audit.
   

Preparing For Your First Retirement Plan Audit

As your plan grows and approaches that 100-participant threshold, it’s smart to get your ducks in a row so your audit goes as smoothly as possible. Here are some things you can do to prepare:

• Track participant counts accurately. The audit threshold is based on the number of participants with account balances at the beginning of the plan year. Keep accurate records so you know when your plan requires an audit.
• Keep good records. In addition to maintaining and updating your plan document, keep complete records of:
  • Payroll and employee contributions
  • Participant distributions and loans
  • Trust and investment statements
  • Plan amendments
  • Participant contact information
  • Communications with participants
• Work with an experienced plan administrator. Choose a third-party administrator that is familiar with ERISA standards, keeps good records, safeguards employee data, and has a good reputation for being responsive and communicative.
• Review your internal controls. Internal controls are the policies and procedures you put in place to help keep your retirement plan organized, accurate, and compliant. Review controls surrounding employee contribution deposits, distribution approvals, participant loan activity, maintenance of participant records, and more.
• Stay abreast of ERISA changes. ERISA was established in 1974, but new regulations change how benefit plans stay compliant. For example, regulations just recently changed the methodology for counting participants. Working with experienced auditors and advisors can keep you updated on new expectations.

Strengthening your plan’s administrative processes and reporting procedures will help you prepare for new filing responsibilities, but it will also help improve the overall efficiency of your plan. In the long run, establishing best practices like the ones we’ve mentioned will create a better experience for your participants and likely help reduce compliance costs.

100-Participant Threshold FAQs

These are the most common questions we get about the 100-participant (or the 120-participant) threshold:

What employees are considered for the participant threshold?

In general, only participants with an account balance at the beginning of the plan year are counted.

What is considered an account balance?

Any non-zero account balance counts — even very small residual balances and accounts with outstanding loans.

Do terminated employees count?

Yes, any plan participant with an account balance will count toward the participant threshold. This includes retired or terminated employees who still hold retirement assets in that plan.

What if the account balances haven’t vested yet?

Yes. Participant counts include individuals with account balances regardless of vesting status

If we cross the participant threshold mid-year, do we need to get that year’s plan audited?

Generally, no. Audit requirements are typically based on the count at the beginning of the plan year, not changes that occur during the year.

What if the plan drops below the participant threshold? Can I stop getting my plan audited?

Possibly. If your participant count falls below the threshold at the beginning of the plan year, your plan is not required to complete an independent audit. However, if your plan has between 80 and 120 participants, the 80-120 rule applies, and you can continue to file as a large employer if you’d like.

While it can be tempting to eliminate the cost of an annual audit, we caution against doing this the first year you fall below the participant threshold. You might benefit from continuing to get your plan audited if:

• You expect your participant count will rebound in the next year or two.
• You have audit processes in place that aren’t burdensome or too costly.
• You use those audited financials to make strategic decisions about your plan.

Lenders, investors, participants, and other stakeholders want and expect audited financials.

Approaching the Audit Threshold? 

Whether you're preparing for your first retirement plan audit or have questions about Form 5500 reporting requirements, Meaden & Moore's Employee Benefit Plan professionals can help you understand your obligations, strengthen your compliance processes, and prepare for a smooth audit experience. Contact our team today to discuss your retirement plan requirements.