A small plan (generally, one with fewer than 100 plan participants at the beginning of the plan year) may obtain a waiver of the audit requirement generally applicable to qualified plans. Following is an overview of the requirements.
Qualifying Plan Assets or Bonding
First, at least 95% of the plan’s assets must be “qualifying plan assets,” or, if more than 5% of the assets are non-qualifying assets, any person handling non-qualifying assets must be bonded for the total amount of non-qualifying plan assets.*
“Qualifying assets” generally include:
- Assets in individual accounts in which the participant or beneficiary exercises control and receives an annual statement from a regulated financial institution describing the assets
- Loans to plan participants
- Qualifying employer securities
- Assets held by a regulated financial institution such as a bank, an insurance company, a registered broker-dealer, or any organization authorized to act as an individual retirement account trustee
- Shares issued by a registered investment company (e.g., mutual funds)
- Investment and annuity contracts issued by an insurance company
SAR Disclosure Requirements
Second, specific information must be disclosed to plan participants and beneficiaries. The summary annual report (SAR) must include the name of each regulated financial institution holding or issuing qualifying plan assets and the amount of qualifying plan assets reported by the institutions as of the end of the plan year (not including qualifying employer securities, participant loans, and participant-directed assets in individual account plans). Also, the name of the surety company issuing the fidelity bond must be included in the SAR.
In addition, the SAR must state that participants and beneficiaries may request (free of charge) to examine or receive copies of evidence of the fidelity bond and any statements from the regulated financial institutions describing the qualifying plan assets. The SAR also must let participants and beneficiaries
know they should notify the regional office of the Employee Benefits Security Administration if they are unable to view or obtain copies of the regulated financial institution statements or proof of the required fidelity bond.
Availability of Financial Statement Requirement
A third condition for waiver eligibility is that upon request of a participant or beneficiary, the plan administrator must, free of charge, make available or furnish copies of each regulated financial institution statement and evidence of any required fidelity bond. Any statements furnished by the administrator must list the name of the institution and the amount of assets held at the end of the plan year.
Although a plan may be exempt from the audit requirement, it must still file Form 5500 and all applicable financial schedules and statements as per the Form 5500 instructions.
Since limited partnership interests are not qualifying assets, the amount of non-qualifying plan assets is $80,000, or 8%. Because this exceeds the 5% limit, a fidelity bond of at least $80,000 must be purchased to qualify for the audit exemption.
*Generally, ERISA Section 412 requires that officials handling funds or other property be bonded for no less than 10% of the amount handled. As a result, in some situations such a fidelity bond will be adequate for small plan audit waiver purposes.
The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.
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