1. What’s new for 2001?
Schedule I, Financial Information -- Small Plan, has added a new line 4k so that small pension plans may report their status with regard to the small plan audit regulations. For plan years that begin before April 18, 2001, line 4k should be answered “Yes.”

For plan years that begin after April 17, 2001, line 4k indicates to the DOL whether or not an audit report is required to be attached.

On October 19, 2000, the DOL released final regulations intended to increase the security of assets in small pension plans by requiring audits by independent qualified public accountants (IQPA) similar to those required for large plans. See chapter 3 for a full discussion of the rules.

Check “Yes” if you are not subject to the requirement to attach an auditor’s report. You are eligible to check yes if Schedule I is being filed for any of these reasons:

1. The plan is a small welfare plan;
   
   
2. The plan is a small pension plan and the plan year began before April 18, 2001; or
   
   
3. The plan is a small pension plan with a plan year that began after April 17, 2001 and the plan complies with all of the following conditions:

• At least 95 percent of the plan’s assets are qualifying plan assets as of the end of the preceding plan year, or any person who handles assets of the plan that are non-qualifying plan assets is bonded in an amount that is at least the value of the non-qualifying plan assets.
• The summary annual report must disclose additional information, if applicable, including (a) the name of each financial institution holding qualifying plan assets and the value of such assets; (b) the name of the surety company issuing a fidelity bond if the plan has more than 5% of its assets in non-qualifying plan assets; (c) a notice that participants may request and receive evidence of the fidelity bond and copies of statements from the financial institutions holding the qualifying plan assets; and (d) a notice that participants should contact the PWBA Regional Office if they are unable to obtain copies of the fidelity bond coverage or the investment statements.
• The plan’s administrator must, without charge, make available for examination (or furnish copies) to a participant or beneficiary of each financial institution’s statement and evidence of any required bond.
  

Example
Plan A, which has a plan year beginning May 1, 2001, had total assets of $2,600,000 as of the end of the 2000 plan year. The investments included only insurance company and mutual fund products. All of the plan assets meet the definition of qualifying plan asset and, therefore, the plan satisfies the first condition noted above. The plan sponsor need not maintain fidelity bond coverage above the threshold normally applicable (10% of plan assets). The plan may check “Yes” in response to line 4k.

All pension plans not meeting the above rules must check “No” and attach the audit report. A small plan may take advantage of the rules in 29 CFR 2520.104-50 in connection with a short plan year of seven months or less. In this case, answer “No” and attach an explanation similar to the statement required for line 3b(2) of Schedule H.

2. Tip: A small pension plan that files Form 5500, rather than Form 5500-EZ, because the plan is aggregated with another plan for purposes of nondiscrimination testing is not subject to these small plan audit rules. Check “Yes” on line 4k. Also enter code 3G on line 8a of Form 5500.

3. Tip: Generally, Schedule R must be completed if the value reported on line 2e is greater than $0.

4. How do you determine the answer to line 4i regarding the 20% holdings?
The 20% threshold is based on the value of plan assets as of the first day of the plan year. Any plan holding that exceeds that threshold should be reported here. There appears to be no distinction as to whether or not the plan permits participant direction of investments. The 2000 instructions provide relief for plans where the investment are the result of participant direction.

This question has been on the small plan form for years, and for years practitioners have disagreed about the data the agencies intend to collect. Some have even gone so far as to suggest that a mutual fund is not a "single security" for purposes of this line. Then let me pose another question: if all of a plan's investments are in a single mutual fund, wouldn't you report it here?

Most of us assume the agencies are concerned about diversification of investments. If this assumption is correct, then it is reasonable to treat a mutual fund as a "single security" for purposes of reporting at line 4i. The same logic can be applied to a common/collective trust or pooled separate account in which the plan has investments.