The Form 5500 is the information return that must be filed by most employee benefit plans subject to ERISA (unless an exception applies), and failure to file this annual return for a plan can result in assessment of penalties by both the IRS and DOL. Employers who maintain benefit plans for their employees are typically very familiar with the requirement to file an IRS Form 5500. However, determining what schedules and attachments are required when filing can often vary depending on plan size and funding.
Most plans with 100 or more eligible participants at the beginning of the plan year must include an accountant’s audit report when filing Form 5500. There is a general exception which allows some smaller plans to avoid attaching an audit to their filing. This exception, referred to as the 80/120 rule, allows plans with between 80 and 120 participants to file as a small plan, with no audit requirement, if they filed as such in the previous year. For example, if your plan had 98 participants last year and no audit was required, but had 115 this year, you can continue to file as a small plan. However, once participation exceeds 120, an audit becomes mandatory unless the plan drops below that threshold in a later year. It’s also important to note that following a new change effective in 2023, “participants” means only individuals with account balances at the start of the plan year.
For sponsors of health and welfare plans, the good news is that ERISA’s audit requirement generally only applies if the plan is funded through a trust (for example, a VEBA), or if participant contributions are otherwise segregated from the employer’s general assets. Most self-funded or insured welfare plans file Form 5500s without needing an audit.
The audit itself must be performed by an independent qualified public accountant and includes testing of contributions, distributions, internal controls, and other plan operations. When selecting an auditor, it is important to ensure that they are qualified and intend to perform all required testing and audit procedures. Before filing each year, it is also important to review your participant counts and funding structure to determine whether your plan crosses the audit threshold. The Form 5500 and required attachments must be filed by the last day of the seventh month after the plan year-end, or July 31st for calendar year plans.
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