What is a 401(k) audit and when is a plan required to have one?
As a company grows in number of employees, it is important for the employer to be aware of the annual audit requirement for larger Defined Benefit and Defined Contribution plans. The audit is performed to help ensure the plan is operated as defined by the plan document and in accordance with IRS and DOL regulations. Regulations require a plan to be audited when the total participant count equals or exceeds 100. This rule applies to ERISA plans, including 401(k) and 403(b) plans. The participant count for audit purposes is as of the 1st day of the plan year. Annually, plans subject to the audit requirement are required to submit to the DOL an independent audit of their retirement plan in addition to the 5500 filing. Audits are conducted by an independent CPA.
Who is considered a Participant?
It is important to understand the definition of a participant for audit purposes. There are three types of participants:
- Active — The definition of an active participant includes currently employed individuals that are eligible to participate in the plan, regardless of whether or not the employee chooses to do so.
- Retired or Separated — The definition of retired or separated employees includes those no longer working for the company who receive a benefit or are entitled to receive a benefit in the future. In defined contribution plans, a terminated employee who has a balance in the plan on the 1st day of the plan year would count as a participant.
- Deceased — Employees who have passed away who have a beneficiary entitled to receive benefit from the plan in the future (or are currently receiving benefit) count as a participant.
What is the exception, known as the 80-120 Participant Rule?
The 80-120 Participant Rule is an exception to the general rule that allows the plan to elect to complete the annual 5500 in the same category as was filed for the prior year. Therefore, for small employers, until the retirement plan’s participant count at the beginning of a plan year goes above 120, the plan can continue to file as a “small plan” and would not require an audit.
For more information regarding audit requirements, please contact our office.