Understanding Financial Statement Audits

While most people are familiar with audits of personal or corporate tax returns, an audit of a qualified retirement plan may be less familiar. Retirement plan audits generally fall into two main categories, and today, we’ll focus on financial statement audits required by the Department of Labor for certain plans.

What Triggers a Financial Statement Audit?

Two primary factors trigger these audits: the number of participants in the plan and the presence of non-qualifying assets. A plan is generally required to undergo an audit if it has 100 or more participants at the beginning of the year, or if the plan holds certain types of non-qualifying assets.

Participant Count Rules

Under the “100 Participant Rule,” any plan with over 120 participants automatically requires an audit. If the count falls between 80 and 120 participants and an audit was conducted in the prior year, an audit will be required again. For reporting purposes, a “participant” includes any eligible employee as well as former employees who still have assets in the plan.

Qualifying vs. Non-Qualifying Assets

The Department of Labor also requires plans to have at least 95% of their assets in “qualifying assets.” Qualifying assets are typically easy-to-value investments, such as stocks or bonds traded on public exchanges. Non-qualifying assets, which may include real estate, collectibles, or privately held company stock, can prompt an audit if they make up more than 5% of a plan’s holdings. An ERISA fidelity bond can cover these assets to avoid the audit requirement.

The Role of ERISA Fidelity Bonds

Purchasing an ERISA fidelity bond for non-qualifying assets can reduce the audit burden by protecting these investments from certain risks. By doing so, you may avoid an audit, but the coverage must match the value of non-qualifying assets.

Need Assistance?

If you have questions about financial statement audits, the rules surrounding participant counts, or how qualifying assets apply to your retirement plan, reach out. Our team is here to help you manage your plan effectively and ensure compliance with all regulations.