Annual Audit Eligibility for 401(k) plans

401(k) and retirement plans in general maybe subject to a plan audit through the Dept. of Labor. It all starts with the to filing of the IRS form 5500.  There are 2 options to the 5500. The “Short Form” and the “Long Form”. The short form is for small plans that have under 100 eligible participants and the Long that is for plans with 100+ eligible participants.  The form offers a snapshot to regulators to see if the plan is in compliance with regulations and plan documents.

If a retirement plan has 100 or more eligible participants and annual audit is required by Federal Law. The question that comes up when determining if it is necessary is: What constitutes as an eligible participant?

3 types of eligible Plan Participants:

  1. Active – All Individuals currently employed by the company sponsoring the plan.
  2. Deceased – An individual who has passed and their beneficiaries are receiving or are entitled to receive benefits.
  3. Retired or Separated – Individuals no longer with the company but are receiving or are entitled to receive benefits.

Once the total number of eligible plan participants reaches 100, the plan administrator is required to have the plan audited by a CPA firm that is qualified to conduct an audit. This CPA firm needs to be independent and have no affiliation with the plan. Because of the nature of business the federal law recognizes that companies expand and contract quite frequently. This is why they have included an exception to this rule.

401(k) Plan Audit Exception

This exception  is referred to as the 80-120 Participant Rule and allows the plat that filed as a small Plan last year to file under small plan in the current year. This allows the plan to once again file as a small plan as long as it does not have over 120 eligible participants. This is a one year exception and if the plan’s eligible participants remains over 100 for the following year the plan is required to file as a large plan and  therefore is required to have an annual audit.

Upon reviewing a plans 5500 auditors consider the following questions in their analysis of a plan:

  • Can all eligible employees participate?
  • Are plan assets fairly valued?
  • Are plan contributions made in a timely manner?
  • Are participant accounts fairly stated?
  • Have benefit payments been made according to the plan document?
  • Were all transactions valid under ERISA rules and regulations governing the plan?

Audit Results Analyzed

Audits are never fun.  However, audits need to be treated as an opportunity for the Pan Administrator to revisit their Fiduciary Responsibility to the plan and its participants. It allows them to strengthen the plan by correcting areas that are not in compliance and allowing the plan administrator to revisit the plan documents.  This gives the plan administrator the ability to address any areas that may need to be changed and/or tightened up to avoid potential problems down the road.  

Written by: Edward Romanowsky, Sr. Compliance Consultant with Aurora Compliance Solutions