Short Plan Year Audit? How to Use the DOL Deferral to Save Time and Money

You’re already navigating a complex employee benefit plan termination and liquidation, and the last thing you need is another immediate, costly audit. But what if you could strategically postpone it? A common misconception regarding short plan year audits for large plans (generally plans with 100+ eligible participants) is that a standalone audit is required. However, this is not always the case. 

The Department of Labor (DOL) offers the opportunity to defer a short plan year audit, which helps organizations efficiently combine the final full year of a plan before liquidation and the period of liquidation into one audit rather than needing two full audits covering each filing period. This article will help break down the DOL’s audit deferral option for short plan years, explain which conditions must be met for this strategy to apply, and outline the benefits of leveraging this strategy.

Understanding the Standard Audit Requirement

Audits are essential for employee benefit plans as they work to safeguard participants and ensure trust in the plans’ operations. Large plans consisting of 100 or more eligible participants are required by the DOL to receive an audit performed by an Independent Qualified Public Accountant (IQPA). One exception under the DOL is the “80-20 Participant Rule”, which allows employee benefit plans to maintain their filing status (as a “small” or “large” plan) from the previous year, helping to avoid costly audit requirements when the participant count fluctuates near the 100-participant threshold. The following table summarizes the audit requirements under the 80-120 Participant Rule:

Audit Requirements Under the 80-120 Participant Rule

If the Plan Filed as a…	And the Current Participant Count is…	Action / Filing Status	Audit Required?
Small Plan (last year)	Fewer than 100	Must continue to file as a Small Plan (Schedule I).	No
Small Plan (last year)	Between 100 and 120	Can elect to continue filing as a Small Plan (Schedule I) under the 80-120 Rule.	No
Small Plan (last year)	121 or more	Must file as a Large Plan (Schedule H). The 80-120 Rule does not apply.	Yes
Large Plan (last year)	100 or more	Must continue to file as a Large Plan (Schedule H).	Yes
Large Plan (last year)	Between 80 and 99	Can elect to continue filing as a Large Plan (Schedule H) under the 80-120 Rule.	Yes
Large Plan (last year)	Fewer than 80	Must file as a Small Plan (Schedule I). The 80-120 Rule does not apply.	No

The Complication: When a Short Plan Year Occurs

A Short Plan Year Defined

While most plans typically experience the same type of audit year in and year out, there is always the possibility of change and various business decisions can factor into the level of complexity involved in the annual audit. An organization may experience these complexities when they undergo certain events such as a plan termination and liquidation, a plan merger, or a change in plan year-end. 

Any of these events may result in a short plan year which the DOL and the IRS Form 5500 instructions defines as “one of the two years under examination being seven months or less.” The DOL allows an exemption for large plan filers to defer the audit for a short plan year under Regulation 29 CFR 2520.104-50. 

Under the regulation, the plan’s comparative audited financial statements are structured to cover three periods: the previous plan year, the present plan year, and the concluding period leading up to the plan’s termination. It is important to note, however, that although a deferred audit enables an audit to be completed together for both periods, the Form 5500 is required to be filed for every year in which the plan held assets. 

For example, if an organization sponsors an employee benefit plan that was terminated during April of 2024, and the plan was not fully liquidated until June of 2025, the plan sponsor is required to file a full Form 5500 for both 2024 and 2025, and audited financial statements covering both periods is only required to be filed with the 2025 filing.

The following table outlines the differences in Form 5500 filing and audit requirements for a short plan year compared to a full plan year for an employee benefit plan.

Form 5500 Filing and Audit Requirements: Full Plan Year vs. Short Plan Year

Requirement	Full Plan Year (12 months)	Short Plan Year (Less than 12 months)
Form 5500 Filing Deadline	Due by the last day of the 7th month after the plan year ends.	Due by the last day of the 7th month after the short plan year ends. The filing deadline is not extended, even if the audit is deferred.
Form 5500 Filing Specifics	Standard Form 5500 filing.	The “short plan year” box must be checked on the Form 5500, and the specific start and end dates of the short year must be entered.
Audit Requirement Threshold	An audit is generally required for “large plans” (typically those with 100 or more participants at the beginning of the plan year).	The same “large plan” audit requirement applies. The number of participants on the first day of the short plan year is used to determine if an audit is needed.
Audit Submission	The audit report, from an independent qualified public accountant (IQPA), must be attached to the Form 5500 filing for the plan year.	An audit is still required, but if the short plan year is seven months or less, the plan administrator can elect to defer the audit report.
Audit Deferral Details	Not applicable.	The audit for the short plan year can be performed and submitted with the following year’s Form 5500. The subsequent year’s filing will include the audit reports for both the short plan year and the following full plan year. This is a deferral, not a waiver, of the audit requirement.

While two Form 5500s will need to be filed, only one audit needs to be completed. In the example of a plan undergoing a termination, the most significant differences in completion of the Form 5500 lie in Schedule H. 

The following table summarizes the key differences for completing Schedule H:

Schedule H Completion: Full Year Audit vs. Short Year Audit Deferral

Schedule H Section & Line Item	✅ Full Plan Year with Audit	⏳ Short Plan Year with Audit Deferral
Parts I & II: Financials	Reports financial activity for the full 12-month plan year.	Reports financial activity for the short plan year period only (e.g., 1-7 months).
Part III, Line 3a-3c: Audit Details	Completed. You must indicate the type of audit opinion (e.g., unmodified) and provide the accountant’s name and EIN.	Skipped. These lines are left blank because no audit opinion is being attached to this specific filing.
Part III, Line 3d: Reason for No Audit	Skipped. This is not applicable because an audit was performed and is being attached.	Completed. You must check box 3d(2) to indicate the audit is deferred for a short plan year of seven months or less.
Required Attachment	The IQPA audit report must be attached to the Form 5500 filing.	The audit report is NOT attached to this filing. It will be attached to the following year’s filing along with that year’s audit.

Why Strategic Deferral Matters

While this strategy may seem like delaying a requirement, it is important to note the valuable operational and financial efficiencies that are created. Conducting one combined audit covering an 18-month period (e.g., a 6-month short year + a 12-month final year) is almost always more cost-effective than engaging an audit firm for two separate, smaller audit periods. Additionally, administrative efficiencies are created by allowing the HR department and plan administrators to only engage with auditors once, streamlining evidence gathering and minimizing disruption. The time saved from deferring the audit allows the HR team and plan administrators to focus on more critical priorities, including executing a termination or plan merger smoothly without the immediate pressure of a concurrent audit.

Key Takeaways

While short plan years created by plan terminations, plan mergers, and changes in plan year-end come with challenges and complexities, an extra audit period does not have to be one of them. An audit deferral creates efficiencies, cost savings, and an overall better experience for both the plan administrators and auditors. 

Johnson Lambert has a deep understanding of the unique challenges and opportunities related to employee benefit plans. With our deep experience, we cut through the noise to show you exactly how to leverage these changes, freeing you up to concentrate on your highest-impact priorities. Contact the Johnson Lambert team if you have questions or are interested in how we can support your employee benefit plan needs.