Understanding financial statement audits

There are two groups of plans that the Department of Labor requires to have financial statement audits by an independent qualified public accountant, or CPA.

While we hope you have never had to experience it, you're no doubt familiar with the idea of an audit of your personal or corporate tax return. But you may not be familiar with an audit of your qualified retirement plan. There are two broad categories of retirement plan audits. Today, we'll focus quickly on two groups of plans that the Department of Labor (DOL) requires to have financial statement audits by an independent qualified public accountant, or CPA.

These audits are based on a plan's participant count or if the plan holds non-qualifying assets. The IRS or DOL also audits employee benefit plans based on questions about their operational compliance, but we'll cover that topic in another chat.

The financial statement audit is triggered by either participant count or non-qualifying assets. In the case of participant count, the general rule is a participant count of 100 or more as of the beginning of the year will trigger an audit. But, here's how it actually works: If the participant count is over 120 an audit is automatically required. If it's between 80 and 120, then the plan must engage an auditor if it did so in the prior year. We can help you navigate the 80/120 rule based on your annual IRS Form 5500 filing information.

For purposes of the 100 participant rule, a participant is defined as any employee who is eligible to participate in the plan, AND any former employee who still has assets in the plan. In order to be considered an eligible participant, an individual does not have to contribute or receive employer contributions or otherwise have any activity in the plan to be included in the beginning of the year count. That's important because it can include former employees if they still have an account balance. This reality, plus the annual plan cost of carrying former employees, might encourage you to force out former employees with small balances.

The Department of Labor also requires small plans with less than 95% of their assets in qualifying assets to obtain an audit, unless those assets are adequately covered by an ERISA fidelity bond.

A qualifying plan asset is generally one that is easily transacted on a public exchange, like the New York Stock Exchange or NASDAQ, or that can be typically purchased from a bank or life insurance company or other regulated entity. Non-qualifying plan assets are investments in things like real estate, coin collections, fine art, a private business or other assets whose value is not easily determined.

If your plan does have more than 5% of its net assets invested in non-qualifying investments, you can avoid an automatic financial statement audit by purchasing an ERISA fidelity bond to cover the value of these assets.

Remember, the audits we're describing here are financial statement audits performed by CPAs, not employee benefit plan audits conducted by the DOL or IRS. In any case, it's always wise to establish and maintain a prudent, professional, documented process to manage your retirement plan and to follow it.


If you have questions about financial statement plan audits or want to learn more about how these rules affect the operation of your plan, please contact Brad Bechtel using the information below.

Brad Bechtel

Senior Vice President
Employee Benefit Services

Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.

Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.

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