This section provides guidance for determining when a qualified public accountant is independent for purposes of auditing and rendering an opinion on the financial information required to be included in the annual report (Form 5500 Annual Return/Report of Employee Benefit Plan) filed with the Department of Labor (Department).

(a) In general. Section 103(a)(3)(A) of the Employee Retirement Income Security Act of 1974 (ERISA) and 29 CFR 2520.103-1(b)(5) of the Department's implementing regulations require that the accountant retained by an employee benefit plan be “independent” for purposes of examining plan financial information and rendering an opinion on the financial statements and schedules required to be contained in the annual report. Under section 103(a)(3)(A) of ERISA the Department will not recognize any person as an independent qualified public accountant who is in fact not independent with respect to the employee benefit plan upon which that accountant renders an opinion in the annual report filed with the Department. In determining whether an accountant or accounting firm is not independent, the Department will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant or accounting firm and that of the plan sponsor or any affiliate thereof, and will not confine itself to the relationships existing in connection with the filing of annual reports with the Department of Labor.

(b) Examples. The following examples are intended to illustrate how the Department would apply paragraph (a) of this section in certain common financial and business relationships. The Department in enforcing the Form 5500 annual reporting requirements will not consider an accountant to be independent with respect to a plan if:

(1)(i) During the period of professional engagement to examine the financial statements being reported, at the date of the opinion, or during the period covered by the financial statements, the accountant, the accountant's firm or a member thereof had, or was committed to acquire, any direct financial interest or any material indirect financial interest in such plan, or the plan sponsor as that term is defined in section 3(16)(B) of ERISA;

(ii) An accountant will not be deemed to have failed the independence requirement under paragraph (b)(1)(i) of this section as a result of any holding of publicly traded securities of the plan sponsor during the period covered by the financial statements if:

(A) The accountant did not audit the client's financial statements for the immediately preceding fiscal year; and

(B) The accountant, the accounting firm, a partner, shareholder employee, or professional employee of the accounting firm, and their immediate family disposed of any holding of publicly traded securities of the plan sponsor before the earlier of:

(1) Signing an initial engagement letter or other agreement to provide audit, review, or attest services to the audit client; or

(2) Commencing any audit, review, or attest procedures (including planning the audit of the client's financial statements); and

(iii) For purposes of paragraph (b)(1)(ii) of this section, publicly traded securities are securities listed on a registered stock exchange in which quotations are published on a daily basis, securities regularly traded in a national or regional over-the-counter market for which published quotations are available, or securities traded on a foreign national securities exchange that is officially recognized, sanctioned, or supervised by a governmental authority and where the security is deemed by the U.S. Securities and Exchange Commission (SEC) as having a ready market under applicable SEC rules;

(2) During the period of professional engagement to examine the financial statements being reported, at the date of the opinion, or during the period covered by the financial statements, the accountant, the accountant's firm, or a member thereof was connected as a promoter, underwriter, investment advisor, voting trustee, director, officer, or employee of the plan or plan sponsor, except that a firm will not be deemed not independent in regard to a particular plan if a former officer or employee of such plan or plan sponsor is employed by the firm and such individual has completely disassociated himself from the plan or plan sponsor and does not participate in auditing financial statements of the plan covering any period of his or her employment by the plan or plan sponsor; or

(3) An accountant or a member of an accounting firm maintains financial records for the employee benefit plan.

(c) Effect of certain other services to the plan or plan sponsors. (1) Subject to paragraph (c)(2) of this section, an accountant will not fail to be recognized as independent solely on the basis that at or during the period of the accountant's professional engagement with the employee benefit plan:

(i) The accountant or the accountant's firm is retained or engaged on a professional basis by the plan sponsor, as that term is defined in section 3(16)(B) of ERISA; or

(ii) An actuary associated with the accountant or accounting firm renders actuarial services to the plan or plan sponsor.

(2) However, to retain recognition of independence, the prohibitions against recognition of independence in paragraph (b)(1), (2), or (3) of this section must not be violated. Further, the rendering of multiple services to a plan by a firm may give rise to circumstances indicating a lack of independence with respect to the employee benefit plan (e.g., result in the accountant or firm providing services that are subject to audit procedures as part of the plan's audit), and, in accordance with paragraph (a) of this section, in determining whether an accountant or accounting firm is not, in fact, independent with respect to a particular plan, the Department will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant or accounting firm and that of the plan sponsor or any affiliate thereof.

(3) Rendering multiple services to a plan by a firm also may involve prohibited transactions under ERISA and requirements to comply with conditions in prohibited transaction exemptions such as prohibited transaction exemption in ERISA section 408(b)(2) for ERISA section 406(a)(1)(C) service provider transactions.

(d) Definitions. For purposes of this section:

(1) Member means all partners or shareholder employees in the firm and all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit; the firm's employee benefit plans; or an entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in this paragraph (d)(1) or by two or more such individuals or entities acting together.

(2) Office means a reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individuals who comprise such subgroup. Substance should govern the office classification, and the expected regular personnel interactions and assigned reporting channels of an individual may well be more important than an individual's physical location.

(3) Period of professional engagement means the period beginning when an accountant either signs an initial engagement letter or other agreement to perform the audit or begins to perform any audit, review or attest procedures (including planning the audit of the plan's financial statements), whichever is earlier, and ending with the formal notification, either by the member or client, of the termination of the professional relationship or the issuance of the audit report for which the accountant was engaged, whichever is later. In the case of an auditor that performs a plan's audit for two or more years, in evaluating independence, the Department would not view the period of professional engagement as ending with the issuance of each year's audit report and recommencing with the beginning of the following year's audit engagement.

[87 FR 54372, Sept. 6, 2022]