401(k) Audit Requirements

A 401(k) plan’s audit requirement is based on the number of employees categorized as eligible participants every year. The DOL terms an employee benefit plan as a “large plan” and requires it to be audited in any year that it has over 100 eligible participants as of the beginning of the year. (See below for a discussion of participant eligibility.) The audit must be attached to the Form 5500, which must be filed by July 31st, unless extended to October 15th. As with many other government regulations, there are exceptions:

Exception 1 (Short Plan Years) – Partial plan years rejoice – even if it is classified as a large plan due to its size, if a 401(k) has a plan year lasting seven months or less (for example, if it started in August and is a calendar year plan), the audit can be deferred to the next plan year. If participation drops significantly the next year, and no audit is required, the short plan year will still have to be audited.

Exception 2 (The 80/120 Participant Rule) – If the eligible employee count is 121 or greater at the beginning of a year, the plan must be audited, no other options. However, if the count is anywhere between 80 and 120, that year’s requirement follows the prior year’s audit requirement. For example, in year 1, there were 90 eligible participants, so no audit was required. In year 2, eligible participants climbed to 115. While the plan was above the 100 eligible participants, because it was still less than 120, it could elect to file as a small plan again. In year 3, when eligible participants rose above 121, the plan will be required to have an audit.

Audits typically take 3 weeks once we get access to your plan’s data.

There is a lot of information we will need to complete your 401(k) audit. Granting us auditor access to your recordkeeper’s website, we can remove the document gathering burden. We’ll gather the basic plan documents, annual reporting documents, and payroll data so that you can focus on your business instead of the endless back and forth.

There are three types of eligible participants that need to be included in your number:

• Active employees: Start with understanding your plan documents. Your Adoption Agreement and Summary Plan Description detail whether there are any excluded types of participants. Examples of possible exclusions are union employees and leased employees. From there, the document describes the age and service requirements and the entry dates, which will allow you to calculate all eligible active employees.
• Former employees: As employees leave the company, they may or may not remove their account balances from the plan. Any employees no longer employed by the company who still have a balance in their account on the first day of the plan year still count as eligible participants.
• Deceased employees: Any deceased employees whose benefits have not been fully received by beneficiaries still count as eligible participants.

No, with current technology an audit can be performed remotely regardless of which city or state your business resides. This also means that auditors no longer need to come to your office and disrupt your normal business practices. We perform audits nationwide. It’s a win-win for everyone.

First, let’s clarify the difference between the three audit types.

In July 2019, the AICPA Auditing Standards Board (ASB) issued a new auditing standard that updates the performance and reporting requirements of ERISA plans. As a result, limited-scope audits are now referred to as ERISA section 103(a)(3)(C) audits (or ERISA 103 audit for short.)

An ERISA 103(a)(3)(c) audit (formerly known as a limited scope audit) does not require the auditor to test investment information. The custodian holding the assets attests to the accuracy and completeness of this information, eliminating the need for an auditor to test it.

A full scope audit must be performed if certification cannot be obtained from a qualified institution (bank, trust company, or insurance company). If you need assistance in determining whether you will need an ERISA 103(a)(3)(c) audit or full scope audit, please call our office.

The Form 5500 (with the audit report attached) is required to be filed by July 31. If needed, you can request a one-time extension by filing a Form 5558. This will extend the deadline to October 15.