What’s the magic number that requires a 401(k) Audit?
By Heather Hayes
Many Plan Sponsors are aware of the general rule for Form 5500 that states that a 401(k) plan that covered fewer than 100 participants can file as a small plan and will not require an audit. The criteria are a little more complicated than this under the “80-120 Rule,” as defined in Section 4 of the General Instructions to Form 5500, which allows a 401(k) plan with 80 – 120 eligible participants (as reported on line 5 of the Form 5500) at the beginning of the plan year to file in the same category as the prior year. Eligible participants are current employees, but are also former employees with a balance in the plan that meet the eligibility requirements of the plan, whether or not the participant decides to participate in the plan. If a plan elects to file as a large plan or is required to file as a large plan using Schedule H, an audit is required.
| Participants: | Form 5500 filed in prior year: | Current Year Form 5500 Options: | Audit: |
| Less than 80 | N/A | Small Plan | No |
| 80 – 99 | Small Plan | Small Plan | No |
| 80 – 99 | Large Plan | Optional (Large or Small Plan) | Yes – Large Plan; No – Small Plan |
| 100 – 119 | Small Plan | Optional (Large or Small Plan) | Yes – Large Plan; No – Small Plan |
| 100 – 119 | Large Plan | Large Plan | Yes |
| Greater than 120 | N/A | Large Plan | Yes |
Most Plan Sponsors depend on their third-party administrator (“TPA”) to advise the Plan Administrator when an audit is required. If a December year end plan meets the audit requirements, the Plan Administrator might be notified by the TPA at the time the Form 5500 is due to be filed (usually in July for December year ends) that an audit is required for the previous year. This leaves a small window of time to find an auditor and complete the audit by the extended due date of October 15. So, this reliance on the TPA might not be the most prudent route to take.
The committee designated by the Plan Sponsor for oversight of the plan is ultimately responsible for ensuring the plan operates in accordance with the Plan Document and within the Department of Labor (“DOL”) guidelines, even if the plan has a TPA to help with this process. Monitoring the plan’s requirements each year will prevent any surprises that could unexpectedly increase costs for the plan’s operations. As a plan begins to get close to the 100 participants range, the Plan Administrator will want to begin preparing for a possible audit in the future.
If you have any questions on the audit requirements of any employee benefit plan, please reach out to a trusted advisor to see how you can be prepared should an audit be required in the future.