A 401(k) Audit Guide for Business Owners: What, When, & Why

If you’re planning to offer your employees a 401(k) as an added benefit, then you probably already know these plans are highly regulated and require a number of actions on your part to ensure compliance with the Employee Retirement Income Security Act (ERISA). One of the steps you’ll need to take each year is to have a third party perform an annual 401(k) audit. What do you need to know about these reviews to make sure your practices are up to snuff? Let’s find out.

In this article, we’ll explain what a 401(k) audit is, who needs one, and what the requirements are for completing a review. After reading this, you’ll know what you need to do each year to ensure your practices are ERISA-compliant.

What is a 401(k) audit?

ERISA requires that certain 401(k) plans be audited annually by an independent third-party certified public accountant (CPA) to ensure compliance with IRS rules and regulations, your plan document, and fiduciary duties. The review will cover all transactions that took place during the year as well as your administrative procedures.

Once the audit’s complete, you’ll need to file audited financial statements from this review along with Form 5500 when you submit it to the IRS and Department of Labor, which we’ll discuss later.

Does my 401(k) plan need an audit?

The requirement for an annual audit only applies to “large” plans, meaning those whose total number of eligible plan participants is 100 or more. It’s important to note that this number includes those who are eligible but not participating as well as terminated or retired employees who still have plan balances.

There are some exceptions to this rule, however, if you’re growing or have fluctuating participant counts. Under what’s called the 80-120 participant rule, if you have between 80 and 120 participants and were considered a small plan the previous year, you don’t need an audit; you’ll only be required to have one once your participant count reaches at least 121.   

Who performs a 401(k) audit?

As we mentioned earlier, a CPA conducts a 401(k) audit. At the end of their review, the auditor will provide you an accountant’s opinion. This document will outline any compliance issues the accountant uncovered during the audit so you can take corrective action. They’ll also provide a financial statement that you’ll need to attach to your Form 5500 when filling it.

What does a 401(k) audit include?

The scope of a 401(k) audit generally involves testing in several areas to assess your plan’s operations, activity, and internal controls, including:

• Eligibility: The review will compare the eligibility provisions in your plan document with what’s being done in practices to identify if there are any compliance issues such as eligible classes of employees not being able to participate.
• Contributions: An auditor will confirm that your plan correctly defines the type of compensation you’re using to determine employee deferrals and matching contributions, such as bonuses.
• Payroll remittance: The review will compare employee contributions and remittance dates to ensure funds were remitted in a timely manner.
• Distributions and rollovers: The auditor will confirm these types of transactions of assets moving out of or into a plan were paid out properly.
• Expenses: An audit will review whether expenses, including investment management, custodian, recordkeeping, professional fees, and other transaction fees, can be paid from the plan.
• Investments: Since one of the key functions of a 401(k) audit is to protect against fraud, the auditors will review financial statements for misappropriation of assets or fraudulent financial reporting.
• Non-discrimination Testing: The review will determine if the plan passed or failed its annual testing; if it failed, then the auditor will make sure the failure has been addressed.

What is needed for a 401(k) audit?

In order for the auditor to complete their review, they will request several documents. To make your audit go as smoothly as possible, you’ll want to gather all of the required information in advance. Here is a list of what may be requested:

• Plan document and any amendments
• Summary plan descriptions and summaries of material modifications
• Recent compliance testing results
• Service agreements
• Financial reports, including payroll records, participant contributions, plan activity, distributions, and fees
• Prior years’ Form 5500
• 401(k) administrative committee or board minutes related to the plan

When should I have an audit?

If your plan is required to undergo an audit, then you’ll need to have one completed annually. Since you need to file audited financial statements along with Form 5500, you’ll want to make sure your audit is completed by the filing deadline for the form, which is the last day of the seventh month after the plan year ends – or July 31 for calendar-year plans.

If you need more time, you can file for an extension using Form 5558 to get an additional 2 ½ months to file, extending the due date to October 15 for calendar year plans.

How long does an audit take?

There’s no exact timeframe in which an audit will be completed. However, generally speaking, it will take about anywhere from 1-4 months depending on your plan size, complexity, current year changes as well as the availability and completeness of your information.

How much does a 401(k) audit cost?

The price for a 401(k) audit will vary depending on the CPA firm you choose to conduct your review. With that being said, you can typically expect to pay around $8,000-$12,000 if you’re a small to mid-sized company.

How to Get 401(k) Compliance Right

If you decide to offer a 401(k) plan at your workplace, there’s a lot to consider to make sure you meet the applicable legal requirements. From getting properly set up with plan documents to annual compliance requirements like an audit and Form 5500 filing, it’s critical to be in the know about all of the conditions that need to be met when offering this type of benefit. Because of the complexity involved with these retirement options, you may be considering a third-party administrator who can help you design, administer and maintain your plan.

As you search for a potential partner, read our next article on the top factors to consider to find the right 401(k) provider for your business.