Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Audit Requirements for Terminated Plan

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

Comments

  1. admin says:

    No I don’t have a specific reference that discussions the change in the pool. I am relying on the definition of “active participant” that is included in the Form 5500 instructions which says that an active participant is:

    Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan.

    This definition of active participant still applies when determining whether an audit is needed for a terminated plan. My source for that conclusion was an AICPA technical practice aid (“EBPAQC Elert #24). Therefore, if a plan is terminated, no new employees will be allowed to enter the plan and so the pool of employees described as “any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement” but who haven’t yet made such an election would be zero. Prior to termination of the plan, those “potential” participants would be included in the number of “active participants”.

    Kim Lubbers, CPA

  2. Bob Gilbert says:

    Is there a formal reference from the IRS or DOL that discusses the change in the pool of employees that makes up “eligiable” participants as discussed in paragraph 3?

  3. Interpetation of your comments in para 3 of Audit Requirements for Terminated Plan leads me to this question: Does the plan have to have an audit in its final year of operation if all accounts have been fully distributed? In this case there were 190 eligible (participants) at the beginning of the year and no eligible participants at the end of the year.

    • admin says:

      Based on my understanding of the rules, the answer is yes. The audit requirement is based on the number of eligible participants at the beginning of the plan year. I have dealt with plan administrators on this before and that is how we have always determined if an audit was required.

      Kim Lubbers, CPA