“What is a Form 5500 limited-scope audit, and how does a plan qualify for one?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related filing Form 5500, Annual Return/Report of Employee Benefit Plan.

Highlights of Discussion

Generally, ERISA requires administrators (the plan sponsors in most cases) of employee benefit plans  with 100 or more participants to have full scope audits of their plans, conducted by an independent qualified public accountant (IQPA), as part of their obligation to file an annual Form 5500 series of reports with the Department of Labor (DOL) and IRS. The IQPA is tasked with conducting an examination of all financial statements of the plan, and of other books and records of the plan as may be necessary, to enable him or her to form an opinion as to whether the financial statements and schedules conform to generally accepted accounting principles and standards.

Under ERISA Section 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the IQPA not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Brokerage firms and investment companies generally would not meet the eligibility requirements for a limited scope audit. However, if those types of firms have established separate trust companies, such trust companies, potentially, could meet the requirements to be a qualified institution for this purpose. A 2002 DOL information letter provides more insight into what constitutes a qualified institution. It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an IQPA’s examination have been satisfied, and only the plan sponsor can request the IQPA to limit the scope of the audit. The American Society of Certified Public Accounts has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

The DOL attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[1] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

Conclusion

While Form 5500 limited-scope audits may be less costly and time consuming up front, if inappropriately used or incorrectly done, they could result in a greater expenditure of money and time in the long run.

[1] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015