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What are the 401k Audit Requirements?

December 08, 2017 By Administrator

This post was originally published January 19, 2016 and extensively updated December 8, 2017.

As a business owner, you know that a 401k plan helps you hire and retain top employees. 401k’s are considered the best retirement plans because it gives your employees more control over their investments and retirement plans. They are also relatively inexpensive to offer and can truly help you recruit top talent to your organization.

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However as your business grows, and more employees contribute to your 401k program, you may have to do a 401k audit. Not sure what a 401k audit is?  Below we’ll go over the 401k audit requirements, the 401k audit process, and 5500 filing requirements.

What is a 401k Audit?

A 401k audit is a review of your 401k plans by a third party administrator (TPA). Also known as ERISA, Employee Retirement Income Security Act, 401k audits are necessary when you have over a certain number of employees actively participating in your company’s retirement plan programs.

The audit is part of your Form 5500 tax return and has to be filed seven months after the plan year end.

In order to determine if your company needs to have your 401k audited by a third party administrator, consider these three audit requirements:

1. How Many Employees Participants In Your Company’s 401k?

Whether your company 401k plan needs an annual audit depends on the number of 401k plan participants. As described in our 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 participants 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 fits 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.

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The 401k Audit Process

ERISA 401k audits are performed by third party administrators, like CMP, to review your company’s program. This is because the audit process is quite extensive and complex.

If you have to perform an audit, you’ll receive a letter from the Department of Labor, DOL, requesting specific documents. These documents will most likely go back three to six years.

We’ll then help you put together all the necessary documentation you need to comply with the DOL’s letter and the Form 5500 filing requirements. It’s imperative to get these documents in on time, as sending them in late could results in fees.

While we’re performing the audit, we’ll also review your plan to make sure it meets all legal requirements.

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:

  1. Helps protect plan assets from plan mismanagement.
  2. 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.

How to Set Up a 401k Plan for Your Business

Setting up a 401k plan for your employees is relatively easy. And if you work with retirement plan experts like CMP, you’ll have a plan ready to share with your employees in no time.

There are a lot of choices out there when it comes to retirement plans: 403(b)’s, profit sharing plans, cash balance plans, multiple employer plans and more. Working with retirement plan experts can help you understand the pros and cons of each and determine what is right for your organization.

Does Your 401k Plan Need an Audit?

Determining ERISA 401k 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 our employee tax plan audit experts to get you started on the right track. CMP can 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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