A pension plan with fewer than 100 participants is generally exempt from the complicated and expensive accounting and reporting requirements that apply to larger programs. But in response to recent reports suggesting that small pension plans are vulnerable to employer embezzlement and misappropriation of funds, the federal government has proposed new rules requiring you to do more to avoid a mandatory audit.
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New Conditions For Audit Exemptions
Under current law, small pension plans are not subject to annual audit obligations that require you to hire an accountant to examine your plan’s financial statements and issue a report to be attached to IRS Form 5500. The exemption applies to small pension plans – including profit-sharing plans, 401(k) plans, money purchase plans and defined benefit plans – that have fewer than 100 participants at the beginning of the plan year.
The proposed rules would require you to meet certain new conditions to avoid having to hire a CPA to perform an annual audit:
- Bonding. At least 95% of the plan’s assets would have to be qualifying plan assets. If they’re not, you would have to obtain a bond for the person handling the assets that covers the total amount of “non-qualifying” investments. Qualifying investments include most securities and assets held by a bank, insurance company, registered broker-dealer or organization authorized to act as an IRA trustee.
- Disclosure. Your summary annual report would have to include the names of the institutions holding qualifying plan assets and the amount of those assets; information about the surety company issuing a bond (if applicable); and a notice that participants may request a free copy of the bond and relevant financial statements. In addition, you’d have to tell employees that they should contact the Department of Labor if they need assistance.
For More Information
The rules may take effect later this year, although the date is not yet certain.