Preparing for an Upcoming Audit

Due to the economic impact of the coronavirus public health crisis, many employers are being forced to lay off or furlough employees. For DC plans, these workforce reductions can potentially have significant implications that are frequently overlooked. A plan may have a partial termination if more than 20% of total plan participants are laid off in a particular year, which means that affected participants become immediately vested in their account balances. It’s important for plan sponsors to understand how their next audits may be different from those in the past and how they can best prepare for them.

What You Should Know

  • Employers should anticipate the possibility of triggering a partial plan termination if there has been or is expected to be a major contraction in staffing. A partial plan termination may also occur if there has been a plan amendment that excludes certain employees or adversely affects vesting.
  • An employer who partially terminates a plan must determine which participants require an acceleration of vesting. An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan.
  • An auditor will probably ask plan sponsors more questions than usual if there is a significant reduction in employees. The auditor will likely need to review any new procures and controls and whether the controls relied upon in the past are still operating given staffing and operational changes.
  • Larger samples of participant distributions and loans for audit testing purposes may be taken if there has been an increase in the volume and amounts of each as a result of a workforce reduction.
  • The audit report may need to include additional plan disclosures as a result of the public health crisis and its economic impact.
  • Plan sponsors should contact auditors as soon as possible to identify all the required documentation that will be needed to ensure the audit foes smoothly and to verify the dates for the next audit.
100+
Number of employees covered in a DC plan as of the beginning of the plan year that will generally necessitate the plan to complete the requirements of a “large plan,” including an annual audit
80/120
rule allows plans with between 80 and 120 participants, as of the first day of the plan year, to file the Form 5500 in the same category ("large plan" or "small plan") as indicated on the prior year’s form