Ensuring the integrity and compliance of your company’s 401(k) plan is crucial. One critical aspect of this responsibility is understanding when and why a 401(k) audit is necessary. This guide will walk you through the essentials of 401(k) audit requirements, helping you navigate the process confidently while staying compliant with 401(k) rules and federal regulations.
What Is a 401(k) Audit?
A 401(k) audit is an official examination of a company’s retirement plan, conducted by an independent qualified public accountant (QPA). The audit ensures that the plan complies with IRS and Department of Labor (DOL) regulations and that financial records accurately reflect the plan’s status.
Objectives of a 401(k) Audit:
- Verify Compliance – Ensures the plan follows ERISA, IRS, and DOL guidelines.
- Assess Financial Accuracy – Confirms that Form 5500 filings and financial records accurately report contributions and distributions.
- Identify and Rectify Errors – Detects operational mistakes that could lead to compliance violations.
Conducting regular 401(k) audits protects the plan’s integrity and ensures that employees’ retirement savings are secure.
When Is a 401(k) Audit Required?
The need for a 401(k) audit depends on whether the plan is classified as a large plan or small plan based on participant count.
- Large Plans – Plans with 100 or more participants at the beginning of the plan year must undergo an annual 401(k) audit.
- Small Plans – Plans with fewer than 100 participants are generally exempt from the audit requirement.
The 80-120 Participant Rule
This rule provides flexibility for plans with participant counts between 80 and 120 at the start of the plan year.
- If the plan filed as a small plan in the previous year and has under 121 participants, it can continue filing as a small plan, avoiding the audit requirement.
- Once a plan reaches over 120 participants, it must comply with 401(k) audit rules and conduct an annual audit.
Recent Changes in 401(k) Audit Rules
As of January 1, 2023, the DOL revised how 401(k) plan participants are counted:
- Old Method: Counted all eligible employees, including those without an account balance.
- New Method: Only participants with an account balance are counted.
This change reduces administrative burdens for small businesses and could exempt more plans from large plan audit requirements.
How to Prepare for a 401(k) Audit
If your plan requires an audit, proper preparation can streamline the process and ensure compliance.
1. Gather Essential Documentation
To ensure a smooth 401(k) audit, organize:
- Plan Documents: Adoption agreements, summary plan descriptions (SPD), and amendments.
- Form 5500 Filings: Previous filings and required schedules.
- Payroll Records: Employee compensation, contributions, and matching details.
- Fidelity Bond Documentation: Proof of ERISA Compliance.
- Participant Data: Enrollment forms, hire dates, and account balances.
2. Review Internal Controls
A key part of 401(k) audit requirements is demonstrating strong internal controls over:
- Employee Contributions – Ensuring timely and accurate deposits.
- Plan Distributions – Verifying eligibility and proper processing.
- Loan Processing – Ensuring compliance with plan provisions.
3. Work With a Qualified Auditor
Selecting an independent auditor experienced in large plan audits ensures compliance with ERISA and IRS regulations. The right auditor will guide you through financial reporting, risk assessment, and procedural improvements.
Consequences of Failing a 401(k) Audit
Failing to conduct a required 401(k) audit can result in:
- IRS & DOL Penalties – Late or incomplete filings can trigger significant fines.
- Plan Disqualification – Non-compliance can jeopardize the plan’s tax-qualified status, leading to adverse tax consequences.
- Increased Scrutiny – The DOL or IRS may conduct a full 401(k) compliance audit, requiring extensive documentation and reviews.
How Admin316 Can Help With 401(k) Audits
At Admin316, we specialize in 401(k) plan administration and audit compliance. Our team helps businesses stay ahead of regulatory requirements and avoid costly penalties.
1. 401(k) Compliance Reviews
We conduct pre-audit compliance checks to ensure your plan meets 401(k) audit rules and DOL requirements.
2. Audit Preparation Support
We assist businesses in:
- Organizing required financial and participant records.
- Identifying compliance risks before an official 401(k) audit.
- Implementing corrective measures to prevent audit failures.
3. Form 5500 Filing Assistance
Admin316 ensures accurate Form 5500 filings, reducing the risk of late fees and penalties.
4. Ongoing 401(k) Plan Administration
We provide full-service 401(k) record-keeping, including:
- Contribution tracking and compliance reporting.
- Employee eligibility verification and benefit distributions.
- Regulatory updates to keep your plan compliant.
5. Expert Guidance for Changing 401(k) Rules
With evolving 401(k) regulations, staying compliant can be challenging. Admin316 keeps your business updated on DOL, IRS, and ERISA requirements, ensuring full compliance.
Conclusion
Understanding and preparing for 401(k) audit requirements is essential for businesses sponsoring retirement plans. Proper compliance helps protect your plan, prevent penalties, and ensure employees receive their full benefits.
Admin316 simplifies 401(k) plan audits, offering expert guidance, record-keeping, and compliance support. Whether you need help with audit preparation, Form 5500 filings, or ongoing plan administration, we’ve got you covered.
Need assistance with your 401(k) audit? Contact Admin316 today for expert support. Visit Admin316 to learn more.