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Form 5500 Audit Requirements: Do You Need a Form 5500 Audit?

Written by Kyle Bonds on March 18, 2021

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Many employee benefit plans (EBPs), including pension, 401(k) or profit-sharing plans, are subject to the guidelines laid out by ERISA, which include an annual audit and evaluation of the financial statements by an independent auditor.

For plans that require an EBP audit, the auditor’s report must accompany the filing of Form 5500. However, the Form 5500 audit requirements are more complex than simply counting active participants, and there are factors that may negate your requirement of having to conduct a Form 5500 audit or an EBP audit altogether.

To fully understand, let’s examine some of the most important guidelines you’ll need to know.

Check for possible issues with your Form 5500 to avoid costly penalties for your company. Receive a free assessment here.

What’s the Difference between the Form 5500 and 5500-SF?

One of the most important differences in whether you file a Form 5500 or Form 5500-SF lies in the Form 5500 audit requirements. There is one important distinction between Form 5500 and Form 5500-SF.

For the annual filing of plans that feature less than 100 plan participants, Form 5500-SF is used. This version of Form 5500 places fewer responsibilities for employers in filing reports.

Conversely, Form 5500 is used for an EBP containing at least 100 active participants. Employers that fall into this category are required to submit specific attachments and schedules in filing their annual Form 5500.

An audit is normally required for plans that file a Form 5500 but not for plans that file Form 5500-SF.

How does Form 5500 relate to EBP audits?

New ERISA guidelines for EBP audits that apply to all year-end 2021 plan audits require that plan sponsors produce a completed or substantially complete draft of their Form 5500. Audit firms may elect to adopt these guidelines early.

The result of this change is that auditors can examine all documents for any material misstatements of fact, as well as material inconsistencies, during the audit process. These duties are performed ahead of the dating of the report from the auditor.

How Is a Limited Scope Audit Different?

When it comes to EBP audit requirements, it’s important to understand the difference between limited and full scope audits.

Not only has the name of this audit changed to an ERISA Section 103(a)(3)(C) audit, but plan administrators now need to identify their responsibilities pertaining to investment certifications and certifying institutions prior to the commencement of the audit.

This is accomplished through an engagement letter that details the certification process, specifies the qualifications of all certifying institutions, and declares that plan administrators have verified that certifications are valid.

It’s important to note that the ERISA Section 103(a)(3)(C) audit will not contain a disclaimer of opinion concerning certified investment information. Instead, the auditor will provide an opinion regarding the presentation of information covered by the certification, as well as the interaction between financial statements and certified investment information.

Who Needs to File Form 5500?

Form 5500 must be filed by the administrators of an EBP. In general, the company’s operations, HR, or finance department, or a combination of these departments, prepare a company’s Form 5500. In some cases, the company’s Form 5500 may be filed by a third-party administrator.

Form 5500 audit requirements depend on whether an EBP is considered a large or small plan. A plan containing less than 100 active participants is responsible for filing a 5500-SF. A large plan contains 100 or more participants, requires the completion of Schedule H and requires an audit.

The determination of a plan being considered large or small depends on the number of eligible participants on the first day of the plan year. However, there is one other factor to consider when making this distinction, which is known as the 80/120 rule.

What Is the 80/120 Rule?

This rule permits an EBP consisting of 80 to 120 participants on the first day of the plan year to file in the same category (i.e., small plan or large plan) as the filing of Form 5500 in the previous year.

For example, if your EBP has 85 eligible participants as of the first day of the plan year, you would file Form 5500-SF. If, in the following year, your plan increases to include 110 active participants on the first day of the plan year, you would be able to file as a small plan despite the fact that your EBP now qualifies as a large plan.

The 80/120 rule only applies to an EBP of less than 120 active participants, so when you break this threshold, you must file as a large plan, regardless of your prior Form 5500 filings.

When is Form 5500 filed?

An EBP plan must file Form 5500 before the end of seven months following the plan year-end. So, in other words, for an EBP that follows the calendar year (ending December 31), Form 5500 must be filed by July 31.

How is Form 5500 filed?

At the start of filing your Form 5500, you first need to identify which type you need to submit. As detailed above, you may be required to submit Form 5500 or Form 5500-SF; or you may submit Form 5500-EZ if your EBP is maintained outside the U.S. or if you have an owner-only plan.

After selecting the appropriate type of Form 5500, you must file it through the use of the ERISA Filing Acceptance System (EFAST2) program.

Next, you need to complete your Form 5500, which is three pages long and requires details such as the number of active participants in your plan, the starting date of your plan, information concerning the benefits and funding of the plan, details about the plan administrator, and the necessary schedules.

Be aware that the schedules you will be responsible for depend on the specific characteristics of your EBP. It is crucial to submit your Form 5500 by the deadline and include all relevant schedules to avoid processing delays or potential penalties.

Warren Averett Can Help with the Audit Process

Warren Averett conducts more than 250 EBP audits every year, making our Firm one of the top 1% accounting firms in this space.

Our experience in handling EBPs with up to 9.5 billion in assets can help simplify the audit process and reduce your risk. Learn more about our Employee Benefit Plan Audit services or call us today for more information about the changes to the Form 5500 audit requirements.

Warren Averett has a specialized team of benefit consultants who can help you complete the timely filing of your Form 5500, as well as any plan design or administration that fits your company’s needs.

Employee Benefit Plan Audit: Is Your Company's Form 5500 Accurate?
 

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