As 401(k) auditors we are frequently asked “How long does a company have to have an audit for a plan that is terminated?” Unfortunately as companies struggle during these tough economic times, plans are being terminated both as an effort to save costs or because the company has closed its doors. As part of the process to terminate an employee benefit plan; more than likely the plan will continue to be required to have an audit. On a side note, a plan is required to file a Form 5500 until all of the plan assets have been distributed.
Bottom line is that the audit requirement rules do not change just because a plan has terminated and is no longer receiving contributions. As discussed at our blog post “Do You Still Need a 401k Audit?” as a rule, plans with more than 100 eligible participants are required to have an audit. Therefore, as long as a plan meets the audit requirements due to the number of eligible participants of the plan, the plan will be required to have an audit.
The most significant change in a plan that has terminated versus a plan that has not terminated is the employees that make up the pool of “eligible participants”. Prior to termination, eligible employees include participants who are eligible to participate, but have elected not to do so. However, upon plan termination, those employees would no longer be counted when determining the number of “eligible” participants. The only employees who would make up “eligible participants” after a plan has been terminated are those participants who have account balances in the plan. For some plans, this difference can be significant enough that it can eliminate its need to have an audit.
There are other criteria for the Small Pension Plan Audit Waiver, however, for the majority of plans, the number of eligible participants is the only criteria that determine whether a plan is required to have an audit or not. Be sure to review these rules carefully. In incorrect decision to have an audit when one is not needed is a waste of money. While an incorrect decision to not have an audit when one is needed, in these days of electronically filed Form 5500’s, will result is a unaccepted Form 5500 and possible penalties for late filing.
Kim Lubbers, CPA