Joining a PEP mid-year? Why audit deferral isn’t an option

By Kimbarley A. Williams, CPA

As pooled employer plans (PEPs) gain popularity, more calendar-year single-employer plans are transitioning, often mid-year.

This shift raises a common question: Can a plan defer its prior-year audit and combine reporting periods into one filing after joining a PEP?

The short answer is no.

ERISA Regulation 2520.104-50 does not permit audit deferral in this situation. Plans must meet specific criteria to qualify, and joining a PEP mid-year does not meet these requirements.

Understanding the scenario

For example, if a calendar-year plan joins a PEP effective March 31, 2026, it must comply with ERISA audit requirements for both the year ended December 31, 2025, and the short plan year ending March 31, 2026.

Although combining these periods into a single audited filing may seem reasonable, the rules do not allow it.

When audit deferral is allowed

ERISA allows audit deferral only under specific conditions. To qualify, a plan must:

• Have two consecutive plan years for the same plan
• Include one short plan year (seven months or less)
• There is an immediately following Form 5500 filing for the same plan, and the second filing includes:
• Audited financial statements for both years, and
• An independent qualified public accountant (IQPA) report covering both periods

These rules typically apply to plan formation, termination, year-end changes, or mergers where the plan remains the same reporting entity.

Why PEP conversions don’t qualify

When a single-employer plan joins a PEP, its reporting status changes fundamentally, which prevents audit deferral.

The key issue is that there is no subsequent filing for the same plan.

Once the plan terminates and merges into the PEP:

• A final Form 5500 must be filed for the short plan year.
• There is no “next” filing tied to that same plan.

As a result, the core requirement for audit deferral, an immediately following filing, is not met.

Separate audits are required

In practice, both reporting periods must be handled separately.

For the example above:

• The December 31, 2025, plan year requires its own audit and Form 5500 filing.
• The short plan year ending March 31, 2026, also requires a separate audit and a final Form 5500.

Because there is not a subsequent Form 5500 for the same plan, the regulatory conditions for combining periods into a single file cannot be met.

PEP reporting has its own boundaries

It is also important to understand what occurs after the transition.

PEPs may only report financial activity from the start of participation. They cannot include pre-merger activity from the single-employer plan. Combining pre- and post-merger data would improperly mix different reporting entities and periods, which ERISA rules are designed to prevent.

Final filing means complete filing

The short plan-year Form 5500 is not an interim step; it is the final filing for that plan.

That means it must be:

• Complete and accurate
• Inclusive of all required attachments
• Supported by an audit report, if applicable

Omitting or delaying these components can create compliance risks.

Practical implications for plan sponsors and auditors

For organizations transitioning to a PEP, advance planning is essential. Anticipate separate audits, communicate timelines clearly, and prepare filings carefully to avoid errors or delays.

Misapplying audit deferral rules can lead to compliance failures.

Bottom line

While PEPs provide administrative and cost benefits, they do not change the audit and reporting requirements for prior plan periods. A plan joining a PEP mid-year must file separate, complete audits for each applicable period, including a final short-year filing.

The Boyer & Ritter team is ready to help you understand the rules, ensure compliance, and support a smooth transition into the PEP structure.

Kimbarley A. Williams, CPA, is a principal of Boyer & Ritter and is chair of the firm’s Employee Benefit Plan Services Group. Kim has over 20 years of experience providing audit, accounting and tax services to employee benefit plans, business trade associations, charitable organizations, community foundations, and closely held businesses. Contact Kimbarley at 717-761-7210 or kwilliams@cpabr.com.