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Does Your 401(k) Plan Need An Audit?

Published on by Joe Conover in Benefit Plan Audits

Does Your 401(k) Plan Need An Audit?

Some businesses’ 401k and retirement plans are too small to need an external audit. Generally speaking, only when your participant count exceeds 100 will you be required to conduct a benefit plan audit. However, there is one exception to this general rule. The “80-120 rule,” as it is commonly known, states that your participant count can rise as high as 120 before an audit is required. This rule can help small- and medium-sized organizations avoid the plan audit requirement while focusing on growing the business. To help our friends and clients understand the rules and regulations, Barnes Dennig has provided an overview of key issues to consider.

Small vs. Large Benefit Plans

The annual report for employee benefit plans, Form 5500, must be filed at the end of each fiscal year by the plan administrator. There are two versions of the form. The long (i.e. standard) version is for “large” benefit plans, and the short version is for “small” benefit plans. To be considered a small benefit plan in the eyes of the IRS, you must have fewer than 100 eligible participants at the beginning of the plan year. The number of plan participants includes active participants, eligible (but not currently participating) employees, and retired, separated, or deceased employees who are currently receiving benefits under the plan.

What is the 80/120 Rule?

The 80-120 rule provides an exception for growing businesses. If you (a) have between 80 and 120 participants, and, (b) were considered a small plan in the previous year, you can continue to file the shortened version of the form. When you report at least 121 participants, you must file as a large plan. If you file as a large plan after employing the 80-120 exception, you must continue to file as a large plan – even if your participant count drops below 120 – as long as you have at least 100 participants in your plan. To help further illustrate this rule, we have a free informational worksheet that you can download here.

Why This Matters

401(k) and 403(b) plans that are filed as “large” plans on Form 5500 must be audited by an external and independent accounting firm. These audits ensure that you are operating your retirement plan in accordance with Department of Labor (DOL) and IRS requirements. While you, as the plan owners, will always have fiduciary duty over your plan no matter its size, an external audit can provide that extra level of assurance that you are acting in your participants’ best interests.

Things to Know Before Your Audit

If your business is approaching the 120-participant threshold, it’s important to become familiar with the plan audit process. An audit of the retirement plan will be in addition to the organization’s annual financial statement audit. The process will feel similar, but the auditor will be looking at only your plan’s assets and activities. To prepare for your first 401(k) audit, we recommend you do the following:

Make sure that you are compliant with your plan document, and with DOL and IRS rules.

Your plan document is the rulebook you need to follow before anything else, so re-familiarize yourself with its clauses. You should also be comfortable with DOL and IRS laws. If you haven’t already, make sure you comply with reporting requirements and timeliness of distributions so that your auditor can easily issue a clean opinion.

Have your documents ready.

There are many documents which will need to be provided to the plan audit. Similar to a financial statement audit, items like bank statements, payroll reports, distribution information, your plan documents and amendments, current year listing of eligible participants, discriminatory tests and findings, etc.

Ask your auditor for help before the process starts.

Communication is the key to success in any endeavor. For this reason, be sure to openly and frequently to gain an understanding of what will be needed, when and details on the process for communicating questions, issues and concerns. The more information you have the better it will be for the audit process in the long run.

Contact Us

Managing the compliance requirements of your 401(k) plan can be challenging especially in light of changing rules and regulations from the Department of Labor and IRS. That’s why it’s important to have a clear understanding of the audit requirements, including exceptions, to ensure your plan maintains compliance. If you have questions or need assistance with an upcoming benefit plan audit, Barnes Dennig can help. For additional information please call us at 513-241-8313 or click here to contact us. We look forward to speaking with you soon.


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