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The Department of Labor’s regulation at 29 CFR 2520.104-46
establishes conditions for small employee benefit plans (generally those
with fewer than 100 participants) to be exempt from the general
requirement under Title I of the Employee Retirement Income Security Act (ERISA)
that plans be audited each year by an independent qualified public
accountant (IQPA) as part of the plan’s annual report (Form 5500).
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The Department amended the regulation in October 2000 to impose
additional conditions for small pension plans to be exempt from the annual
audit requirement. The purpose of the new conditions is to increase the
security of assets in small pension plans by improving disclosure of
information to participants and beneficiaries and, in certain instances,
requiring enhanced fidelity bonds for persons who handle plan funds. The
amendments went into effect beginning in 2001.
The Employee Benefits Security Administration (EBSA) has received a
variety of questions on how to determine whether a small plan has met the
conditions for the audit waiver. The purpose of this document is to answer
frequently asked questions about the audit waiver requirements under the
amended regulation. Questions concerning this guidance may be directed to
the EFAST Help Line at 1.866.463.3278. The EFAST Help Line is available
Monday through Friday from 8:00 am to 8:00 pm, Eastern Time.
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Pension plans with fewer than 100 participants at the
beginning of the plan year are eligible if they meet the conditions for an
audit waiver under 29 CFR 2520.104-46.
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Yes. All Schedule I filers that meet the conditions of the
audit waiver are eligible. If the plan meets the conditions of the “80
to 120 Participant Rule,” it may file as a small plan and attach
Schedule I instead of Schedule H to its Form 5500. Under the 80 to 120
Participant Rule, if the number of participants covered under the plan as
of the beginning of the plan year is between 80 and 120, and a small plan
annual report was filed for the prior year, the plan administrator may
elect to continue to file as a small plan.
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Yes. The plan administrator must disclose that it is
claiming the waiver by checking “yes” on Line 4k of Schedule I of the
Form 5500 filed for the plan.
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No. Small pension plans that cannot claim the audit waiver
may still file Schedule I, but must attach the report of an IQPA to their
Form 5500. They also do not need to include schedules of assets held for
investment, a schedule of reportable transactions, the Schedule C or
Schedule G.
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No. Only plans filing as small plans can rely on the small
pension plan audit waiver.
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No. If a plan meets another exception to the IQPA audit
requirement, for example, if it is a small pension that is not required to
complete Schedule I (such as a plan using a Code section 403(b) annuity
arrangement that is exempt from the audit requirement under 29 CFR
2520.104-44) it does not have to meet the audit waiver requirements in 29
CFR 2520.104-46.
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In addition to being a small pension plan filing the Schedule I, there
are three basic requirements for a small pension plan to be eligible for
the audit waiver:
First, as of the last day of the preceding plan year at least 95% of a
small pension plan’s assets must be “qualifying plan assets” or, if
less than 95% are qualifying plan assets, then any person who handles
assets of a plan that do not constitute “qualifying plan assets” must
be bonded in an amount that at least equal to the value of the “non-qualifying
plan assets” he or she handles.
Second, the plan must include certain information (described below) in
the Summary Annual Report (SAR) furnished to participants and
beneficiaries in addition to the information ordinarily required.
Third, in response to a request from any participant or beneficiary,
the plan administrator must furnish without charge copies of statements
the plan receives from the regulated financial institutions holding or
issuing the plan’s “qualifying plan assets” and evidence of any
required fidelity bond.
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“Qualifying plan assets” are:
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Any asset held by certain regulated financial
institutions (see the next question);
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Shares issued by an investment company registered
under the Investment Company Act of 1940 (e.g. mutual fund shares);
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Investment and annuity contracts issued by any
insurance company qualified to do business under the laws of a state;
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In the case of an individual account plan, any assets
in the individual account of a participant or beneficiary over which
the participant or beneficiary has the opportunity to exercise control
and with respect to which the participant or beneficiary is furnished,
at least annually, a statement from a regulated financial institution
describing the plan assets held or issued by the institution and the
amount of such assets;
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Qualifying employer securities, as defined in ERISA
section 407(d)(5); and
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Participant loans meeting the requirements of ERISA
section 408(b)(1), whether or not they have been deemed distributed.
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Only the following institutions are “regulated financial
institutions” for purposes of the audit waiver conditions:
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Banks or similar financial institutions, including
trust companies, savings and loan associations, domestic building and
loan associations, and credit unions.
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Insurance companies qualified to do business under
the laws of a state;
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Organizations registered as broker-dealers under the
Securities Exchange Act of 1934;
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Investment companies registered under the Investment
Company Act of 1940; or
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Any other organization authorized to act as a trustee
for individual retirement accounts under Internal Revenue Code section
408.
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Not necessarily. If the plan obtains bonding in accordance
with the provisions of the regulation and otherwise meets the waiver
requirements, it can still claim the audit waiver.
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Administrators can use the following diagram to help decide whether they meet the conditions for being eligible for the audit waiver.
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All plan assets that must be reported on the Form 5500 Schedule I
line 1a, column (b) for the end of the prior plan year must be included in
the calculation of “qualifying” and “non-qualifying” plan assets.
The calculation must be made as soon as the information regarding the
plan’s assets at the close of the preceding plan year
practically can be ascertained. This generally will be much sooner than
the due date for filing the Form 5500 for that preceding plan year.
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In the initial plan year, the plan administrator may rely
on estimates. The administrator should follow a similar method to the one
described in 29 CFR 2580.412-15 for estimating the amount required for the
ERISA section 412 fidelity bond for an initial plan year. For example, if
a plan will be investing exclusively in assets that meet the definition of
“qualifying plan assets,” for example, insurance contracts and mutual
fund shares, bonding in addition to that required under section 412 would
not be necessary to meet the first condition for claiming the audit
waiver.
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You should make the determination by treating the new plan
as not having a preceding reporting year and use the assets actually
transferred from the predecessor plan to determine whether the new plan
meets the 95% percentage condition for “qualifying plan assets.”
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Generally, the account must be a trust or custodial
account. For example, plan assets held in bank custodial, common or
collective trust or separate trust accounts are qualifying plan assets. In
addition, securities held by a broker-dealer for the plan in an omnibus
account are qualifying plan assets. Checking and savings accounts that
create a debtor-creditor relationship between the plan and the bank are
also “qualifying plan assets” for purposes of the audit waiver
conditions.
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No. Plan assets put in a safe deposit box with a bank are
not qualifying plan assets.
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Yes. The account statements must be statements of the
regulated financial institution, but the institution’s regular
distribution systems may be used to transmit the statements to
participants and beneficiaries. For example, a statement prepared by the
regulated financial institution, on the institution’s letterhead
including contact information that a participant could use to confirm the
accuracy of the information in the statement with the regulated financial
institution could be given to the plan administrator for distribution to
the plan participants and beneficiaries. However, a statement prepared by
the plan administrator, even if based on data from the regulated financial
institution, would not meet the audit waiver condition.
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Persons that handle non-qualifying assets must be covered
by a fidelity bond or bonds that meet the requirements of section 412 of
ERISA, except that the bond amount must be at least equal to 100% of the
value the non-qualifying plan assets the person handles. Persons handling
non-qualifying plan assets can rely on normal rules and exemptions under
section 412 in complying with the audit waiver’s enhanced bonding
requirement. For example, if the only non-qualifying assets that a person
handles are not required to covered under a standard ERISA section 412
bond (e.g., employer and employee contribution receivables described in 29
CFR 2580.412-5) that person would not need to be covered under an enhanced
bond for a plan to be eligible for the audit waiver.
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All the non-qualifying assets, not just a selection that
represent the excess over 5%, are subject to the enhanced bond
requirement.
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Yes. The person handling the non-qualifying plan assets
can obtain his or her own bond. Also, a company providing services to the
plan can obtain a bond covering itself and its employees that handle
non-qualifying plan assets. The bond has to meet the requirements under
section 412, such as the requirements that the plan be named as an
insured, that the bond not include a deductible or similar feature, and
that the bonding company be on the U.S. Department of the Treasury’s
Circular 570 list of approved surety companies. [http://www.fms.treas.gov/c570/c570.html]
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Section 412 of ERISA provides that persons that handle plan funds or
other property generally must be covered by a fidelity bond in an amount
no less than 10 percent of the amount of funds the person handles, and
that in no case shall such bond be less than $1,000 nor is it required to
be more than $500,000. In some cases, 100% of the value of non-qualifying
plan assets may be less than 10% of the value of all of the plan funds a
person handles. Under those circumstances, the section 412 bond covering
the person will satisfy the audit waiver condition because the amount of
the bond will be at least equal to 100% of the non-qualifying plan assets
handled by that individual.
For example, a person may handle a total of $1 million in plan funds,
but only $50,000 are non-qualifying plan assets. In that case, the ERISA
section 412 bond covering the person should be equal to or greater than
$100,000, which would be more than the value of the non-qualifying assets
the person handles. For that person, the ERISA section 412 bond would also
satisfy the audit waiver enhanced bonding requirement.
Even where the amount of an existing section 412 bond is insufficient
to meet the audit waiver requirement, plan administrators may want to
consider increasing the coverage under the section 412 bond rather than
getting a new fidelity bond.
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The plan administrator must include the following additional
information in the Summary Annual Report (SAR) furnished to participants
and beneficiaries to be eligible for the small pension plan audit waiver:
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Except as noted in the
following question below, the name of each regulated financial institution
holding or issuing “qualifying plan assets” and the amount of such
assets reported by the institution as of the end of the plan year;
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The name(s) of the surety company issuing enhanced
fidelity bonding, if the plan has more than five percent of its assets
in “non-qualifying plan assets;”
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A notice indicating that participants and
beneficiaries may, upon request and without charge, examine or receive
from the plan copies of evidence of the required bond and copies of
statements from the regulated financial institutions describing the
“qualifying plan assets;” and
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A disclosure stating that participants and
beneficiaries should contact the Department of Labor’s Employee
Benefits Security Administration (EBSA) Regional Office if they are
unable to examine or obtain copies of the regulated financial
institution statements or evidence of the required bond.
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No. The enhanced SAR disclosure is not required for the following qualifying plan assets:
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Qualifying employer securities as defined in section
407(d)(5) of ERISA and the regulations issued thereunder;
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Participant loans meeting ERISA section 408(b)(1) and
the regulations issued thereunder; and,
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In the case of an individual account plan, any assets
in the individual account of a participant or beneficiary over which
the participant or beneficiary has the opportunity to exercise control
provided the participant or beneficiary is furnished, at least
annually, a statement from an eligible regulated financial institution
describing the assets held or issued by the institution and the amount
of such assets.
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Yes. Even if 95% of the plan's assets are
qualifying plan assets, to be eligible for the audit waiver, the SAR must
include the required information on the regulated financial institutions
holding or issuing the plan's qualifying plan assets.
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The regulations do not require that model language be
used for the required enhanced SAR disclosures. Rather, as long as the SAR
includes the required information, it will satisfy the audit waiver
condition. The Department did not issue model SAR disclosure text as part
of the regulation because there are various ways that plans can satisfy the audit waiver conditions.
Nonetheless, the following example may assist administrators in composing
SAR disclosures for their plans that would satisfy the regulation. Plan
administrators will need to modify the example to omit bonding or other
information that is not applicable to their plan.
The following is language for a model notice:
The U.S. Department of Labor’s regulations require
that an independent qualified public accountant audit the plan’s
financial statements unless certain conditions are met for the audit
requirement to be waived. This plan met the audit waiver conditions for (insert
year) and therefore has not had an audit performed. Instead, the
following information is provided to assist you in verifying that the
assets reported in the Form 5500 were actually held by the plan.
At the end of the (insert year) plan year, the plan had
(include separate entries for each regulated financial institution holding
or issuing qualifying plan assets):
[set forth amounts and names of institutions as applicable]
[(insert $ amount) in assets held by (insert name of bank)],
[(insert $ amount) in securities held by (insert name of registered
broker-dealer)],
[(insert $ amount) in shares issued by (insert name of registered
investment company)],
[(insert $ amount) in investment or annuity contract issued by (insert
name of insurance company)]
The plan receives year-end statements from these
regulated financial institutions that confirm the above information. [Insert as applicable - The
remainder of the plan’s assets were (1) qualifying employer
securities, (2) loans to participants, (3) held in individual participant
accounts with investments directed by participants and beneficiaries and with account statements from regulated financial
institutions furnished to the participant or beneficiary at least annually, or (4) other assets covered
by a fidelity bond at least equal to the value of the assets and issued
by an approved surety company.]
Plan participants and beneficiaries have a right, on
request and free of charge, to get copies of the financial institution
year-end statements and evidence of the fidelity bond. If you want to
examine or get copies of the financial institution year-end statements or
evidence of the fidelity bond, please contact [insert mailing address and
any other available way to request copies such as e-mail and phone number].
If you are unable to obtain or examine copies of
the regulated financial institution statements or evidence of the fidelity
bond, you may contact the regional office of the U.S. Department of
Labor’s Employee Benefits Security Administration (EBSA) for assistance
by calling toll-free 1.866.444.EBSA (3272). A listing of EBSA regional
offices can be found at www.dol.gov/ebsa. General information regarding
the audit waiver conditions applicable to the plan can be found on the
U.S. Department of Labor web site at www.dol.gov/ebsa under the heading
“Frequently Asked Questions.”
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