DOL Begins Review of Plan Sponsors Claiming the Small Plan Audit Waiver (SPAW)

By David M. Beck, CPA, QPA, ERPA, CTCPA Employee Benefit Plans Interest Group

In 2001, a revised set of “Small Plan Audit Waiver” (SPAW) rules became effective. These rules revised the conditions that must be satisfied by a “Small Plan” (i.e., a Plan covering less than 100 participants) in order to be exempt from the requirement to obtain a financial statement audit from an Independent Qualified Public Accountant (IQPA). According to ASPPA (American Society of Pension Professionals & Actuaries), the Department of Labor’s (DOL) Inspector General recently began a review of how the DOL monitors those plans claiming the waiver. In fact, they have already sent requests to plan sponsors claiming the exemption requesting information related thereto.

The term “retirement plan” as used in this article refers to those plans covered by ERISA; generally, this would include any defined contribution or defined benefit retirement plan sponsored by an employer that covers at least one non-owner employee. Plans funded through Individual Retirement Accounts (such as SEP’s and SIMPLE IRA’s) are not affected by these rules.

But First, Some Background

The audit requirement

Retirement plans with more than 100 Participants as of the first day of the Plan Year (“Large Plans”) must engage an IQPA to perform a financial statement audit of the Plan. When determining the Participant count, all of the following individuals are included:

  • Employees who are eligible to receive and/or make any contributions to the Plan, regardless of whether or not they have received and/or made any such contributions.
  • Terminated Participants who have a vested benefit in the Plan.

If a Plan filed as a Small Plan in the previous year, the Plan is eligible to file as a Small Plan again (and can therefore claim the SPAW) provided there are no more than 120 Participants. This exception is known as the “80-120 rule.”

Fidelity bond requirements

All retirement plans must obtain a fidelity bond with coverage equal to at least the lesser of a) 10% of plan assets or b) $500,000. The $500,000 limit increases to $1,000,000 for Plans holding employer securities. Plans seeking to rely on the SPAW might be required to obtain coverage in excess of these amounts as described more fully below. When reviewing fidelity bonds on behalf of your Plan(s) and/or those of your clients, note the following:

  • A fidelity bond protects the plan from theft of plan assets, while fiduciary insurance protects fiduciaries from claims brought by plan participants. The former is mandated by ERISA.
  • All individuals “who handle funds or other property” of a retirement plan must be bonded. Plan sponsors should consider obtaining a bond which automatically covers all required individuals by definition (instead of by name).
  • Make sure the bond either precisely names the plan, or covers by definition all plans of the plan sponsor.
  • Make sure the bond qualifies as an “ERISA fidelity bond;” among other requirements, there cannot be a deductible on an ERISA fidelity bond.

Second, Some Definitions

Qualifying Plan Assets

Qualifying Plan Assets include:

  • Any investment held by a Regulated Financial Institution” (e.g., banks, insurance companies)
  • Investments in mutual funds and insurance contracts
  • Qualifying Employer securities
  • Participant Loans and contributions receivable.

Fortunately, this enumeration covers the vast majority of investments held in retirement plans. These investments receive special treatment in the SPAW rules described below. Examples of investments that would not be considered Qualifying Plan Assets are real estate, mortgages and collectibles. As these non-Qualifying Plan Assets cause the DOL the most concern, the SPAW rules impose substantial requirements on such investments.

Custodian vs. Recordkeeper

When determining compliance with the SPAW it is critical to ascertain whether or not the recordkeeping and custodial functions are performed by the same entity. The custodian is the entity that is holding the investments and accounting for the Plan’s holdings at the Plan level. The recordkeeeper performs the participant level accounting, including generating and mailing statements to Participants. Both functions are often times performed by either the same entity or by entities that are closely related. However, there are several large, nationally recognized recordkeepers (and a plethora of smaller ones) who work with unrelated banks and trust companies to perform the custodial function.

Safe Harbor Individual Accounts

Safe Harbor Individual Accounts (which is NOT a term used in the regulations) have the following characteristics:

  • Participants are permitted to direct the investment of these accounts; and
  • All investments are held by a custodian that is a Regulated Financial Institution and that institution sends to the participant, at least annually, a statement of their account.

Note that this definition is much more restrictive than that of Qualifying Plan Assets. If the recordkeeping function is fulfilled by an organization other than the Regulated Financial Institution with custody of the assets, the accounts will not be considered Safe Harbor Individual Accounts. Pooled accounts invested at the direction of the Trustee(s) will also never be considered Safe Harbor Individual Accounts.

Small Plan Audit Waiver Requirements

First and foremost, Small Plans invested exclusively in Safe Harbor Individual Accounts are deemed to satisfy the SPAW rules and do not need to comply with any of the following requirements (hence the “safe harbor” terminology). All other Small Plans must satisfy a) the “Investment / Bonding Requirements” and b) the “Summary Annual Report Disclosure” requirements.

Investment / Bonding Requirements

One of the following requirements must be met to satisfy the Investment / Bonding Requirements:

  • At least 95% of Plan Assets must be invested in Qualifying Plan Assets or Safe Harbor Individual Accounts; OR
  • A fidelity bond must be obtained with coverage equal to at least the amount of those assets that are neither Qualifying Plan Assets nor Safe Harbor Individual Accounts. This can be the same fidelity bond generally required by ERISA –it is only the amount of coverage required that is altered.

Summary Annual Report Disclosures

The following disclosures must be included in the Summary Annual Report distributed to Participants. [The Summary Annual Report summarizes the contents of the Form 5500]:

  • The name of the regulated financial institution holding Qualifying Plan Assets (except for Safe Harbor Individual Accounts) and the amounts held by each institution.
  • The name of the insurance company issuing the fidelity bond, but only if the Plan is subject to the special SPAW bonding requirements described above (i.e., if < 95% of assets are Qualifying Plan Assets).
  • A disclosure that Participants can request copies of the documentation supporting the foregoing disclosures.
  • A disclosure that Participants should contact the DOL if they are unable to obtain this supporting documentation.

Important Take-Aways

  • Small Plans that are completely invested in Safe Harbor Individual Accounts have no additional requirements under the revised SPAW regulations.
  • All other plans at a minimum are required to include additional disclosures in the Summary Annual Report, even if they are invested entirely in Qualifying Plan Assets.
  • Be diligent about determining whether or not the entity mailing statements to participants is the same regulated financial institution that is holding plan assets. This represents the single most substantial source of non-compliance.

This article first appeared in the November/December 2014 issue of Connecticut CPA magazine.