New Small Plan Audit Rules Take Effect
August 2002

DOL FAQs on Small Plan Audits (January 2004)

On October 19, 2000, the Department of Labor finalized its regulations regarding which small plans would continue to be exempt from the requirement of an independent accountant's audit. Small plans are generally those that have less than 100 participants at the beginning of a plan year. Historically, these plans have always been exempt from the independent audit requirement imposed on larger plans. The new regulations state that small plans must now meet certain requirements in order to continue to be exempt from the independent plan audit. Plans failing to meet the exemption will have to have an independent accountant's opinion filed along with the annual Form 5500. The effective date of the new regulation is for plan years beginning after April 12, 2001. For calendar year plans, this means that the first year for the new rules is the 2002 plan year.

Requirements to be exempt from the small plan audit:

At least 95% of the plan assets (measured at the beginning of the plan year, e.g., January 1, 2002 for a calendar year plan) are invested in “qualifying plan assets” (see below),
OR
Have those assets not defined as qualifying plan assets covered by a surety bond equal to the value of those assets. Note a 10% bonding requirement up to $500,000 already exists for plans covered by these new rules.

Include in the Summary Annual Report:

• The name of each institution holding the qualifying plan assets and the year end value of them;
  
• The name of the surety company covering the nonqualifying assets;
  
• A notice that the participants can request a copy of the surety bond; and
  
• A notice that the participants should contact the DOL if a copy of the bond is not provided to them.

Qualifying plan assets are:

• Qualifying employer securities;
  
• Participant loans;
  
• Assets held by a regulated financial institution;
  
• Shares of a registered mutual fund;
  
• Investments and annuity contracts held by insurance companies;
  
• Assets held by a registered broker-dealer.

For calendar year plans, the tax year 2002 Form 5500 will be the first impacted by these new rules. If your plan did not meet the qualifying assets percentage as of January 1, 2002, there is more than ample time to either arrange for an audit or to seek bonding on the nonqualifying assets. For an off-calendar year plan, the new rules apply for plan years beginning after April 12, 2001. Thus, a plan whose 2001 plan year ended on April 30, 2002 would need to apply the new rules to the annual report for the 2002 plan year that began May 1, 2002.

Recommendations for actions:

• If an audit will be required, don't wait until the last minute to contract with the auditor. The audit process can be very long and is usually somewhat expensive.
  
• If a surety bond is required, the surety bond is coordinated with the bond already required for plan fiduciaries. Thus, if the nonqualifying assets are less than 10% of the total plan assets, then no additional bonding will be required. If, however, the nonqualifying assets exceed 10% of the total assets, then additional bonding will be required
  
• Because of the general market for casualty insurance, employers may encounter difficulty in obtaining coverage in excess of the normal $500,000 maximum limit. Don't wait until the last minute to add a surety bond.