A 401(k) plan audit is required if it is considered a large plan for Form 5500 purposes. By the first day of the plan year , plans with more than 100 participants with balances must undergo an annual audit.  Except for the initial plan year of a plan, the count will be done on the last day of the plan year instead of the first day of the plan year. Also note that plans years beginning before January 1, 2023 will count eligible participants instead of participants with balances. These large plans must attach the auditor’s report to the Form 5500 filing.

There is one exception to the general rule: The “80-to-120 participant rule.” This rule requires the number of participants at the beginning of the year to be between 80 and 120, and for a Form 5500 to be filed for the prior plan year. If these criteria are met, the plan may file a Form 5500 in the same category as the year before, whether this is a small or large plan.

A plan that files a small filer 5500 for the plan year is not subject to the required large plan audit until it exceeds the 120-participant threshold at the beginning of a plan year.

Yes – the plan sponsor needs to hire an independent, qualified public accountant.

According to the U.S. Department of Labor (DOL) “The Form 5500 Series is an important compliance, research, and disclosure tool for the Department of Labor, a disclosure document for plan participants and beneficiaries, and a source of information and data for use by other Federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies.

The Form 5500 Series is part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants and beneficiaries, as well as regulators, are provided or have access to sufficient information to protect the rights and benefits of participants and beneficiaries under employee benefit plans.”

When counting participants in a 401(k) plan, you must count all eligible employees, whether or not they participate in the plan. You must also count all separated participants with account balances. The number of participants is counted on the first day of the plan year, not on the last day of the previous plan year.

If your participant count is close to requiring a plan audit, we recommend that you work with your service provider to see if there are any former employees that still have balances in the plan. If so, you might be able to remove the former employees from the plan in accordance with the terms of your plan document.

The Department of Labor has changed the participant count methodology effective January 1, 2023, to only include participants with account balances. Previously, the participant count included all participants who were eligible to participate in the plan even if they did not participate in the plan. This update is effective starting in the 2023 plan year.  The previous guidelines still apply for the 2022 plan year and the audits for these plans that will be completed in 2023.

Your 401(k) plan audit should be completed before the Form 5500 filing deadline. Form 5500s are required to be filed by July 31 for calendar year-end plans, or filed by the last day of the seventh month after the plan year ends.

You may, however, file an extension with the DOL using Form 5558 to get an additional two and a half months to file. This extends the due date to October 15 for calendar year-end plans. It’s important to meet the required deadline to avoid any DOL penalties.

The plan will need to be audited annually unless the participant count drops to the point that it is considered a small plan (less than 100 total participants at the beginning of the plan year) and thus the audit is no longer required.

Yes, there is an exception to the audit requirements: Short Plan Years. If the plan would qualify as a large plan, and its plan year is seven months or less, the plan sponsor may elect to defer the audit requirement to the following plan year. In the following year, the plan sponsor will be required to have the plan audited for the short plan and the subsequent year.

Standard requested documents for the 401(k) plan audit include:

• Executed plan documents
• IRS determination or opinion letter
• Executed amendments
• Summary plan descriptions
• Meeting minutes as they pertain to the plan
• Service agreements with the recordkeeper and custodian/trustee
• Copy of the plan’s fidelity bond
• Payroll Reports
• Trust Report from plan recordkeeper
• Copy of Form 5500

Once the audit has been completed, a copy of the final financial statements of the plan will be electronically attached to Form 5500.

An ERISA Section 103(a)(3)(C) audit permits the plan administrator the option of not having investment information (at the plan level only) tested during the audit. In order to permit a limited-scope audit, the investment information must be certified by the trustee or custodian as ‘complete and accurate.’ This certification must be from a qualified institution. Under DOL regulations, a qualified institution is one that is regulated and subject to periodic examination by a state or federal agency such as a bank, trust company, or similar institution including an insurance company.

There are two common errors we often see in employee benefit plan audits.  The first error is late participant deferrals. The DOL is particularly focused on ensuring that participant contributions from payroll contributions are remitted to the plan on a timely basis.  Any contributions remitted later than the 15th business day of the month following the month the participant contributions were withheld are deemed late per the DOL. However, this general rule often confuses plan sponsors in a number of ways. First and foremost, the 15^th-day provision is not a safe harbor. Thus, if contributions are not remitted to the plan within a “reasonable” timeframe, they would be considered late remittances, even if they were remitted within the 15th business day of the next month. To comply with this, plan sponsors must know the earliest date they can reasonably segregate the contributions.  It is a best practice to remit employee contributions to the plan in the same timeframe that payroll taxes are submitted from employees’ paychecks. The DOL also looks at trends in remittances. For example, if an employer typically remits within two days of the paycheck date, however, does not remit the contributions until 11 days after one payroll period, this would most likely be considered a late contribution by the DOL.

The second error we often see in plan audits is the failure to use the correct definition of compensation as stated in the plan document to calculate participant deferrals and employer contributions. Plan documents allow for certain types of compensation to be either included or excluded from plan compensation such as bonuses, commissions and fringe benefits.  We often see definitions of compensation errors with nonregular pay such as bonuses or commissions. This can occur when the plan document does not exclude bonuses or commissions from the definition of compensation but the plan failed to allow employees to make a deferral and/or failed to make an employer-match contribution on bonus or commission compensation.