Managing your ESOP participant count is essential in determining whether there is an audit requirement, but it is often confusing to plan sponsors. The audit requirement is determined based on the number of eligible participants reported on the Form 5500 filing as of the beginning of the plan year.
The definition of an eligible participant for ESOPs includes:
- Current employees who are eligible to participate in the plan
- Terminated participants who still have an account balance in the plan
Generally, ESOPs with 100 or more eligible participants are categorized as large plans and are required to attach audited financial statements to their Form 5500 filing. However, the 100 number is only applicable for ESOPs in their initial year of existence. Plans that have existed for more than one year are subject to certain exceptions, commonly referred to as the 80-120 rule.
Many ESOP plan documents are written so that employees are eligible as of the beginning of each plan year even if eligibility requirements aren’t met until later in the plan year, which can trigger the need for an audit even if the ESOP is new or in its early stages.
The table below illustrates the various requirements based on the number of eligible participants at the beginning of the year.
ESOPs with more than 120 eligible participants at the beginning of the plan year are automatically subject to the audit requirement with no applicable exceptions. ESOPs with fewer than 100 participants are exempt from the audit requirement, unless the plan trustee requests an audit. If a plan exceeded 120 participants in the prior year, but currently has between 100 – 120 eligible participants, an audit would be required until the eligible participant count falls below 100. On the contrary, if the number of eligible participants was under 100 in the prior year, an audit would not be required until the number of eligible participants exceeds 120.
As we enter 2023, now is the time to determine whether your ESOP needs an annual audit for the 2022 plan year. It is important to review the eligible participant detail for accuracy and identify the audit requirement as soon as possible to engage an audit firm to properly plan and perform the audit. Additionally, plan sponsors will need to obtain a valuation of the company’s stock soon after fiscal year-end to provide the auditors with enough time to complete the audit within regulatory deadlines.
Plan sponsors often need assistance with determining the eligible participant count and whether an audit is required. Working with plan record keepers and your audit firm is important in order to identify the requirement in advance and properly complete the audit in a timely manner.
We regularly work with plan sponsors to assist with the audit determination and discuss best practices to stay ahead of the audit requirement. If you have any questions or would like to discuss this topic in further detail, please contact us.
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