When Is a 401(k) Plan Audit Required?

A 401(k) plan serves as a foundational component of retirement savings for many individuals across the United States. While employers and employees commonly understand the mechanics of contributions and investment choices, a less familiar aspect involves the annual audit requirement for certain plans. This requirement ensures the plan’s financial integrity and compliance with federal regulations.

The 100-Participant Rule

The primary factor determining if a 401(k) plan requires an annual audit is known as the “100-participant rule.” Generally, plans with 100 or more participants at the beginning of the plan year are classified as “large plans.” These large plans must undergo an annual audit by an Independent Qualified Public Accountant (IQPA). This mandate stems from regulations established by the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Service (IRS).

The audit ensures the plan operates in accordance with its terms and complies with governmental guidelines. It provides oversight, verifying the accuracy of financial information and the proper administration of the plan. Such an audit helps protect the interests of plan participants and beneficiaries by confirming that contributions are correctly handled and funds are managed responsibly.

Counting Plan Participants

Counting participants is crucial for determining if a 401(k) plan meets the audit threshold. For plan years beginning on or after January 1, 2023, participant counts are based solely on the number of participants with an account balance in the plan as of the first day of the plan year. This updated methodology differs from prior rules that often included eligible employees even if they had not contributed or held a balance.

This count includes active employees who have an account balance, as well as former employees who still retain an account balance within the plan. Beneficiaries of deceased participants who maintain an account balance are also included in this calculation. Plan administrators should review their records carefully to identify all individuals holding a balance on the plan’s first day to ensure an accurate participant count.

First-Year Rules and Special Circumstances

Specific situations impact the 100-participant rule. A newly established 401(k) plan typically does not require an audit in its first year, regardless of participant numbers. This is because the audit requirement applies to the participant count at the beginning of an established plan year.

Another exception is the “80-120 Participant Rule,” a Department of Labor (DOL) provision for plans fluctuating around the 100-participant threshold. If a plan had fewer than 121 participants at the beginning of the current plan year and filed as a “small plan” in the preceding year, it may continue to file as a small plan and avoid an audit. Conversely, if a plan filed as a “large plan” in the prior year and has between 80 and 120 participants at the beginning of the current year, it must continue to file as a large plan and undergo an audit. This rule helps avoid frequent changes in filing status due to minor participant count fluctuations.

The Audit Requirement and Form 5500 Filing

When a 401(k) plan is identified as a “large plan” and requires an audit, the primary reason is to fulfill an annual reporting obligation. This obligation involves filing Form 5500, the Annual Return/Report of Employee Benefit Plan. Large plans must attach audited financial statements and an independent auditor’s opinion to their Form 5500 submission.

The audit verifies the accuracy of financial information reported on Form 5500 and the overall operations of the plan. This process confirms the plan’s financial data aligns with generally accepted accounting principles and adheres to Department of Labor and IRS regulations. The plan administrator or sponsor is responsible for ensuring the audit is completed and Form 5500, with its required attachments, is filed accurately and on time. Failure to comply can result in significant penalties from both the IRS and the DOL, which can range from $250 per day up to $150,000 for IRS penalties, and up to $2,529 per day with no maximum for DOL penalties.