Avoiding a Plan Audit (and cutting costs!)

There's always a lag time between when analysts say the economy is turning around and when money actually starts rolling in again. When the bottom line is still not where you want it to be, and you are still looking to cut costs, your retirement plan should not be one of them. However, what you can do is attempt to cut the costs to maintain the plan. Avoiding a plan audit is one way to do that.avoiding a plan audit   cutting costs

Avoiding a plan audit could be one way to cut your retirement plan costs without cutting your retirement plan. If your retirement plan requires an audit, this is for you!

Avoiding a Plan Audit: An Employer may decrease the number of participants in a plan by splitting the plan into more than one component, and by ensuring that there are less than 100 participants in each component. We have outlined some advantages and disadvantages of splitting a plan for purposes or reducing the number of participants in each plan. This will make it so that no plans are subject to the Form 5500 audit requirements.

If this solution won't work for your particular company, contact us to request our IRS Audit Preparation Guide.

Background overview:

The Small Business Job Protection Act of 1997 removed 401(a)(26) for defined contribution plans; thus, removing the rule of minimum participation in defined contribution plans. This allowed an employer to sponsor two plans with different sets of employees as long as the participants from each plan are tested separately or together for the 410(b) and 401(a)(4) compliance testing.

Process

  • Assign different classes of employees to each of the separate plans so that there are fewer than 100 participants in each plan
  • Prepare a plan document for the new plan(s) similar to the existing plan
  • Clarify in the new plan what employees are excluded from participation
  • Amend the existing plan to exclude the opposing class of employees when compared to the new plan
  • Audits are determined based on the number of eligible employees in the plan at the beginning of the plan year. So the first year following the year in which the plan is split, an audit is no longer required (as long as each plan remains under the audit threshold)
  • Assets remain in one trust

TIP: The process may sound complicated, but most of the work will fall into the hands of your TPA. If you have a knowledgeable and thorough TPA this shouldn't be a problem. If you don't, pick up the phone and give us a call!

Costs

  • A new plan document and amendment to the existing document
  • An annual Form 5500 filing and administration is required for both plans
  • The accounting will include time to split the assets in the trust between the participants of each plan
  • Testing for the plans is done in aggregate, so there is only one testing fee

Advantages

  • Eliminating the cost to have auditors prepare an attachment to the Form 5500 filing (Audit requirement)
  • No change to the way the data is provided to the TPA for annual administration
  • Each plan is designed in a similar fashion

Disadvantages

  • There is some additional complexity in the annual administration
  • Administration costs will increase

In Summary: When making the decision to split your company sponsored retirement plan (and thus avoiding a plan audit), you will need to decide if eliminating the cost and effort involved in providing the annual audit is worth the additional cost in administration for more than one plan. Obviously, if the costs > benefits, this is not the road you want to take, but it certainly does not hurt to review all of your options.

If you would like more information on avoiding a plan audit, comment below or give us a call!

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