What is a 401k audit?

A 401k audit ensures that your company’s 401k plan complies with the requirements set in the plan and with regulations set by the Department of Labor and IRS. Your Form 5500 and financial statements are also evaluated in order to guarantee the information you have provided is accurate.

The importance of the audit lies in finding any non-compliant parts of your plan, so you can make corrections for the financial safety of your company and employees.

Due to the extensive nature of this audit, it can last anywhere between three to four months depending on the specifics of your company.

401k audits are performed by a CPA or auditor independent from your company so that unbiased and objective results are given.

401k Audit Requirements

The requirements of a 401k audit are determined by certain determinations of the Employee Retirement Income Security Act (ERISA).

As a rule of thumb, your company is required to have its plan audited each year if it has 100 or more eligible participants, and for the first time once there are 120 eligible participants on the first day of the plan year. Once you have had an audit, your 401k plan must be audited every year afterward, until there are less than 100 eligible participants.

When figuring out if your plan will need an audit, you can ask yourself three crucial questions:

1. How many employees participate in my company’s 401k plan?

Your first required 401k audit will be determined by the number of eligible participants in your 401k plan. Collect the necessary information on plan participants so you can determine the volume of eligible members.

2. Which of my employee's count as eligible participants in my 401k plan?

Whether or not an employee is an eligible participant is determined by requirements set by both the IRS and the company’s 401k plan agreement. If a current employee is eligible to contribute to your company’s 401k according to the plan’s documents, then they are an eligible participant.

This means that some employees count as eligible participants that you might have glanced over. Employees that decided not to participate in the plan and employees that have been terminated but still have a balance in their 401k plan on the first day of the plan year are still counted as eligible participants!

If your number of eligible participants adds up to 120 or higher since the start of the plan year, then an audit will be required.

3. What is the “80-120” rule and does it apply to my company?

In some cases, a company has 100 or more eligible participants in their 401k plan but is not required to have an audit. But how does this happen? 

With the “80-120” rule, plans with 80 to 120 participants are not required to have an audit as long as the number of eligible participants does not rise over 120 at the beginning of the plan year. If this “small” plan status was filed in the prior tax year, your company can continue without a 401k audit.

Form 5500 Due Date

For most companies, Form 5500 and financial statements are due July 31, or October 15th with an extension.

In technicality, seven months after your 401k plan year ends, your IRS Form 5500 and financial statements are due to be completed and submitted. With an extension, you can postpone this due date by two and a half months.

Example of Form 5500

What is involved in a 401k audit?

During your audit, your company’s plan-related documentation will be reviewed and analyzed.

The auditor will make sure that the plan is performing within the requirements determined by the plan itself while also remaining compliant with the government regulations required by the IRS and DOL.

Plan-related financial statements and Form 5500 will then be reviewed and checked over, ensuring that all information is correctly reported.

When drilling into specifics, auditors will be looking for details such as:

  • How your company maintains its 401k records
  • If distributions and rollovers were paid out correctly
  • If employee contributions were processed in a timely manner

Preparing For a 401k Audit

If you think that your 401k plan might need its first audit, take some time to review your plan and get all documentation in order. While a first-time audit might seem like a daunting task, with the correct help there’s nothing to stress! Working with an experienced plan auditor will help you understand each step of your audit, keep your plan paperwork organized, and remain within your correct due date.

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