An annual 401(k) audit is an essential task for large and mid-sized businesses. Not every company is obligated to conduct an annual audit, but the United States government has set strict rules about which businesses do and don’t need one. You should understand what the 401(k) audit requirements are so that you can follow the proper guidelines for your business.
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).
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 eligible participants. If your business has 100 or more eligible participants at the beginning of the plan year, you must undergo a 401(k) audit through a third party. The “keyword” in this situation is “eligible,” so even if some of your employees choose not to participate, they still count toward the audit requirement. With most businesses, employees are eligible for the 401(k) plan if they are age 21 or older and have at least one year of employment with the company. Your plan criteria may differ, though, so you should look into your plan’s specifics to determine how many eligible participants you have.
The number of eligible participants includes active employees and retired or separated employees who currently receive or can receive 401(k) benefits. It also includes deceased employees with beneficiaries who receive or are eligible to receive benefits.
There are two main exceptions to the standard rule of 100 eligible employees 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 eligible participants 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 eligible employees is between 80 and 120, your audit requirement will stay the same as the previous year. For example, if you had 85 eligible participants in the first year and 115 in the second year, you will not need an audit for either year. This can continue indefinitely as long as the number of eligible participants stays under 120. When you have more than 120 eligible employees, you’ll always need an annual audit.
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.