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