Audit Requirements for 401(k) Plans

When we’re talking about tax planning, common questions we receive from clients and potential clients are, “Does our 401(k) plan require an audit?” and, “What triggers the audit requirement for a 401(k) plan?” There are a few different answers to these questions depending on your plan’s facts and circumstances, so we will go over a few of them below.

General Rule

Generally, plans with 100 or more eligible participants as of the first day of the plan year will require an audit for that plan year. “Eligible participants” in this case include not only employees that are actively participating in the plan but also employees that are eligible for participation but do not elect salary deferrals. Additionally, former employees that have funds in the plan and beneficiaries of deceased participants that still have funds in the plan count in the determination of total eligible participants. While this alone may seem straightforward, there are a few additional considerations to keep in mind.

The 80–120 Rule

Companies that sponsor 401(k) plans experience employee turnover at different rates. As a result, the number of participants used to determine if your plan is a large plan filer (100 participants or more) can fluctuate from year to year. Because of this, the 80-120 rule exists. This rule allows a plan to file the same version of the 5500 (5500 or 5500-SF) as it did in the prior year if the participant count falls between 80 and 120. For example, if your plan has 98 participants as of January 1, 20X1, and 103 participants as of January 1, 20X2 and the plan filed form 5500-SF for 20X1, the plan will not require an audit for the 20X2 plan year if it filed the 5500-SF again in that year. This allows the plan to continue filing form 5500-SF without an audit requirement as long as the number of eligible participants remains under 120.

Short Plan Years

Another consideration relates to short plan years. This scenario is common with plan mergers and terminations. For plans that have short plan years of seven months or less, the audit requirement can be postponed until the following year, however, the form 5500 filing without the independent auditor’s report is still required to be made for the short plan year. The 5500 filed for the short plan year should indicate that the audit has been deferred. When the audit occurs for the following plan year, it should cover the short plan year plus the subsequent full plan year. The 5500 should report the activity from this full period as well.

The determination of whether a 401(k) plan requires an audit or not can be a difficult one. If you need assistance in coming to the correct conclusion, please contact us at info@mahoneycpa.com.  

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