On October 19, 2000, the Department of Labor published a final rule to improve the security of the more than $300 billion in assets held in private-sector pension plans maintained by small businesses. In recent years, considerable public attention has focused on the potential vulnerability of small plans to fraud and abuse.
Although such circumstances are rare, the DOL decided it was appropriate to strengthen the security of pension assets and the accountability of persons handling those assets.
Historically, pension plans with fewer than 100 participants have been exempt from the requirement to have an independent audit of the plan's financial statements. This regulation is designed to safeguard small pension plan assets by adding conditions to the audit waiver requirement that focus on persons who hold plan assets, enhanced disclosure to participants and beneficiaries and improved bonding requirements.
The audit requirement for health and welfare plans is not affected by this regulation. Under the regulation, the administrator of an employee pension benefit plan that is required to complete Schedule I of the Form 5500 is not required to engage an independent auditor provided:
- At least 95 percent of the assets of the plan constitute "qualifying plan assets";
- or -
- Any person who "handles" assets of the plan that do not constitute qualifying plan assets is bonded in accordance with Employee Income Security Act of 1974 (ERISA) section 412 and DOL Regulation 29 CFR 2580.412-6;
- and –
- Certain required disclosures are made in the plan's summary annual report (SAR).
According to the DOL, the vast majority of the assets of small plans are "qualifying plan assets." The DOL believes that the plans that do not meet the 95 percent threshold will opt for the less expensive bonding alternative to avoid an independent audit of the plan’s financial statements.
Definition of Qualifying Plan Assets
For purposes of this regulation, the term qualifying plan assets means:
Qualifying employer securities, as defined in Employee Retirement Income Security Act of 1974 (ERISA) section 407(d)(5) and the regulations issued there under;
- Any loan meeting the requirements of ERISA section 408(b)(1) and the regulations issued there under;
- Any assets held by any of the following institutions:
- A bank or similar financial institution as defined in section 2550.408b-4(c);
- An insurance company qualified to do business under the laws of a state;
- An organization registered as a broker-dealer under the Securities Exchange Act of 1934; or
- Any other organization authorized to act as a trustee for individual retirement accounts under Internal Revenue Code section 408.
- Shares issued by an investment company registered under the Investment Company Act of 1940;
- Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; and
- 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 with, at least annually, a statement from a regulated financial institution describing the assets held (or issued) by such institution and the amount of such assets.
The exemption from the audit requirement for small pension plans is further conditioned on the disclosure of certain information to participants and beneficiaries. Specifically, the SAR of a plan electing the waiver must include, in addition to any other required information:
- Except for qualifying plan assets, as previously described, 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;
- The name of the surety company issuing the bond, if the plan has more than 5 percent of its assets in non-qualifying plan assets;
- A notice indicating that participants and beneficiaries may, upon request and without charge, examine or receive copies of, evidence of the required bond and statements received from the regulated financial institutions describing the qualifying plan assets; and
- A notice stating that participants and beneficiaries should contact the 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, as applicable.
In response to a request from any participant or beneficiary, the administrator, without charge to the participant or beneficiary, must make available for examination, or upon request furnish copies of, each regulated financial institution statement and evidence of any bond required.
The amendments made by this final rule are applicable as of the first plan year beginning after April 27, 2001. Accordingly, this change applied to the 2001 year filings for fiscal year filers whose plan years begin after April 27, 2001, and the 2002 filings for calendar year filers.
Plan auditors should advise their small plan clients that they must indicate on Schedule I, Item 4k, whether they are claiming a waiver of the audit requirement.