When is My Company Required to Perform a 401k Audit?

Conducting an annual 401(k) audit is crucial for the majority of large and mid-sized companies. While not every business is required to perform an annual audit, the United States government has established strict criteria about which businesses do and don’t need one.

It’s imperative to understand what the 401(k) audit requirements are so that you can follow the proper guidelines for your company.

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What Is a 401k Audit?

A 401(k) audit is a review of your company’s 401(k) plan by a third-party accounting firm to ensure that the plan is within the guidelines and regulations set by both the IRS and the Department of Labor. During the audit, the accountant will identify any errors in the plan, which provides an opportunity for you to correct the issues right away.

Not only is a 401(k) audit necessary to comply with the government’s regulations, but it also helps you offer a successful and effective retirement plan to your employees. Not all businesses need to undergo an annual 401(k) audit, though. The requirements for auditing are set by the Employee Retirement Income Security Act (ERISA).

When Do You Need a 401k Audit?

Your business is required to file Form 5500 by the end of the fiscal year. There are two versions of Form 5500. The long version is intended for large benefit plans, and the short version is intended for small plans. The correct form for your company depends on the number of employees you have who are eligible for the retirement plan.

Your 401(k) audit requirements also vary depending on the number of 401(k) account balances. If your 401(k) Plan has 100 or more account balances at the beginning of the plan year, you must undergo a 401(k) audit through a third party. The keywords in this situation are “account balances.” The number of account balances includes active employees and retired, deceased, or separated employees who have 401(k) assets held under the Plan.

401k Audit Exceptions

There are two main exceptions to the standard rule of 100 account balances requiring an audit. During a partial plan year that lasts seven months or less, you can defer your audit to the following year. However, if the number of account balances drops below 100 the next year, you’ll have to conduct an audit for the partial plan year.

The other exception is known as the 80-120 rule. If the number of account balances is between 80 and 120, your audit requirement will stay the same as the previous year. For example, if you had 85 account balances in the first year and 115 in the second year, you would not need an audit for either year. This can continue indefinitely as long as the number of account balances stays under 120. When you have more than 120 account balances, you’ll always need an annual audit.

What if you had a 401(k) audit in the previous year and are now unsure if you need an audit for the current year?

— 79 account balances or less: no audit is required

— 80-99 account balances: a 401(k) audit is optional

— 100+ account balances: a 401(k) audit is required

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If you’re unsure whether your company needs a 401(k) audit, reach out to an accounting firm specializing in 401(k) audits for more information. There are penalties for missing an audit, so you should carefully check each year to determine whether or not you need one. A 401(k) auditing firm can help you clear up any confusion or uncertainty about your requirements. To make the process as effortless as possible, start reviewing your company’s 401(k) plan and eligible participants now.

At PriceKubecka, it’s our mission to ensure clients have a better 401(k) audit experience. CONTACT US today to get your high-quality, low-cost audit started and finished well before the July 31 deadline.

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