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.
The rule in one paragraph
A retirement plan generally needs an independent audit attached to its Form 5500 when it is a large plan. Since the 2023 plan year, a defined contribution plan counts only participants with account balances at the beginning of the plan year — not everyone who is merely eligible. That change alone moved thousands of plans back under the threshold, and a lot of sponsors are still budgeting for an audit they no longer need.
The 80–120 rule, worked
The exception nobody explains properly: if your participant count at the start of the plan year is between 80 and 120, you may file in the same category you filed last year. It buys continuity, not a permanent exemption.
| Participants w/ balances at BOY | Filed last year as | This year |
|---|---|---|
| Under 100 | Small | Small — no audit |
| 112 | Small | May stay small — no audit |
| 112 | Large | Must stay large — audit required |
| Over 120 | Either | Large — audit required |
| First plan year, 150 | n/a | Large — audit required |
What the audit actually costs and covers
For a first-time large plan, expect a meaningful five-figure line item in total: the auditor's fee plus the internal hours spent assembling records. The auditor is not checking investment performance. They are testing whether the plan was operated the way the document says:
- Deferrals withheld from payroll match what was deposited, and were deposited timely
- Eligibility and entry dates were applied correctly to every hire
- The plan's definition of compensation was used for deferrals, match and testing
- Distributions, loans and hardships were approved under the document's terms
- Participant data reconciles between payroll, the recordkeeper and the trust
Note what those five items have in common: they are all administrative, and every one of them is the plan administrator's responsibility. An audit is essentially a graded exam on plan administration.
The findings that show up over and over
| Finding | Root cause | Prevention |
|---|---|---|
| Late deferral deposits | No documented deposit schedule; payroll gaps at year end | Written funding calendar, deposit tracked every pay run |
| Wrong compensation definition | Payroll excludes bonus/commission the document includes | Annual document-to-payroll crosswalk |
| Missed eligible employees | Part-time and rehire tracking failures | Monthly eligibility report, not annual |
| Missing participant data | Records never migrated from a prior provider | Data audit at conversion, not three years later |
| Unallocated forfeitures | Nobody was assigned the task | Named owner and an annual forfeiture sweep |
Getting through it without the fire drill
The audit is not the hard part. Assembling three years of evidence in four weeks is the hard part. Plans that sail through have the signed plan document and every amendment in one place, payroll registers reconciled to remittances each quarter, a distribution file with the approval trail attached, and one person who owns the answer to every auditor question.
If you are approaching the threshold, the work to prepare should start a full plan year ahead — and if your Form 5500 is already late while you wait on the audit, understand the exposure first: read our analysis of how often plans file late and what it costs, and who is legally on the signature line.
Frequently asked
Can we file the Form 5500 while the audit is unfinished? Filing without the required audit report makes the filing incomplete, which can trigger penalties as if it were never filed. Extend instead.
Does a safe harbor plan avoid the audit? No. Safe harbor affects nondiscrimination testing, not the audit threshold.
Do we need a new auditor every year? No, but the auditor must be independent, and plan audits are a specialty — a firm that does two a year is a risk, not a bargain.
Not sure who is actually on the hook at your company?
Admin316 serves as the ERISA 3(16) plan administrator and 402(a) named fiduciary, which means we sign the Form 5500 and carry the administrative fiduciary duty instead of your owner or HR lead.
Run the free fiduciary risk check