​Does Your Business Need a 401(k) Audit?

If your business offers employees a 401(k) retirement plan, you might need an audit after a certain number of your staff start taking part in the program.

The word “audit” can sound scary. But a 401(k) audit — which a third party will need to perform — is just part of running your business. And when you work with a trusted CPA firm like ours, you can rest assured we’ll make the processes as painless as possible.

So, how do you know if you even need a 401(k) audit?

There are three questions you need to ask yourself:

• How many employees take part in your business’s 401(k)?
• Which employees count as “eligible”?
• Does your business fit in the 80-120 exception?

If your program has 100 or more eligible participants, you likely need an audit. Also, “eligible” is the key term here. If you have eligible employees who’ve opted not to take advantage of your retirement plan, they still count toward the audit requirement.

According to the IRS, an employee counts toward that 100 mark if — at the end of the previous tax year — they are:

Active: An “active” employee is one who is taking part in your company’s retirement plan or one who is eligible but not participating.

Retired or separated: This is someone who is a retired plan participant who receives benefits or who is eligible to receive benefits. This can also include someone who left your organization but still has an active plan with you.

Deceased: This is someone who’s died but whose beneficiaries receive your plan’s benefits or are entitled to those benefits.

Companies with 80 to 120 participants can opt out of an audit if their plan falls into the “small” category in the previous tax year. It also allows programs that have more than 100 eligible participants to keep filing as a small plan as long as the number of eligible employees doesn’t go above 120 participants.

So, if your plan had 78 eligible participants in 2018, 111 participants at the start of the 2019 tax year, and 118 at the beginning of the 2020 tax year, your business could still file as a small plan for 2020.

The cost of a 401(k) audit for your business depends on a couple of factors: the size of your 401(k) plan and how complicated your business’s situation is. However, whatever third party you hire (and it has to be a third party; you can’t do a 401(k) audit internally) should be able to provide you a quote that includes their assessment of your situation.

Here’s a list of things you’ll need after you’ve hired a third party and are preparing for your audit:

• List of the auditor’s requirements
• IRS Form 5500
• Certification letter from the plan custodian or trustee
• Cash and investments documents for your plan
• Cash and Investment statements certified by your custodian or trustee
• Plan compliance testing results and any other compliance documents
• Contribution, rollover, and forfeiture information
• Benefits paid or payable and expenses
• Activity that took place after the end of the plan year
• Written 401(k) plan documents and internal controls
• Written and signed plan documents and adoption agreements

If you need help with your business’s 401(k) audit or just have a question, we’d be happy to talk about your options!