As a business owner, you know that a 401k plan helps you retain your top employees. However, with the expansion of your business comes increased obligations. So, you may have wondered:
Does my company 401k plan need to be audited?
As your company grows, the number of retirement plan participants will increase as well, and your company 401k plan may require an audit as part of your Form 5500 tax return obligations. Read on to find out if your company 401k plan needs an audit.
In order to determine if your company needs to have your 401k audited by a third party administrator, consider these three things:
1. How Many Plan Participants Are In Your Company 401k?
Whether your company 401k plan needs an annual audit depends on the number of plan participants. As described in further detail in our previous blog post, Do All Employee Benefit Plans Need an Audit?, an employee benefit plan — 401k or another type of benefit plan — needs to be audited if the plan has 100 or more eligible participants.
This means that if you are the administrator of a company 401k plan with 100 or more active participants, you are legally required to obtain an independent audit for the plan as part of your annual tax obligations — with one important exception, which we’ll address in a moment.
2. Consider Your Eligible Plan Participants
The following types of 401k plan participant are considered eligible and will be counted toward your 100-participant tax threshold:
Active — Current employees covered under the plan (includes employees that are eligible but don’t currently participate in the plan).
Retired or separated — Retired plan participants who either receive plan benefits or are entitled to receive said benefits.
Deceased — Deceased former employees with one or more beneficiaries who receive plan benefits or are entitled to do so.
3. Know, and Understand the “80-120” Rule
There are some cases where an employer may have 100 eligible participants in their 401k plan, but they are not obligated to get an audit.
This exception allows plans with 80 to 120 participants to forego an audit if the plan fit the category of a “small” plan in the prior tax year. This exception can allow plans with more than 100 eligible participants continue to file as a “small” plan (i.e., no audit requirement) indefinitely, as long as the number of plan participants doesn’t rise above 120 participants.
So, for example, if your plan had 75 eligible participants in 2013, 105 participants at the beginning of the 2014 tax year, and 118 at the beginning of the 2015 tax year, you could continue to file as a small plan for 2015.
What Are the Benefits of a 401k Plan Audit?
Whether or not your 401k plan legally requires an audit, an audit provides two major benefits:
- Helps protect plan assets from plan mismanagement.
- Helps protect the plan administrator from financial penalties that may result from filing an incomplete or inaccurate Form 5500.
Ultimately, a 401k plan audit benefits you as the plan administrator by making sure the plan is well-managed and fulfills all legal obligations.
Does Your 401k Plan Need an Audit?
Determining 401k plan audit requirements isn't always easy. If your employee 401k plan needs an audit, or you’re not sure if you need an 401k audit, please contact us to consult with our employee tax plan audit experts to get you started on the right track. We’ll help you determine if you need an audit and also determine if your plan may be eligible for a limited scope (partial) audit.
Learn more about our 401k plan audit services or click below to schedule your consultation.
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