Key Takeaways
A 401(k) plan audit is an official review of your company's qualified plan by a third-party accounting firm
Audits help ensure an employer a plan meets guidelines and regulations set by the IRS and DOL
Beginning in 2023, plans with 100+ participants and a balance as of the first day of the plan must undergo an annual audit
As an employer offering a 401(k) plan, you may find your plan is required to undergo an annual audit. A 401(k) plan audit refers to an official inspection of the financial standing of a 401(k) plan by a third-party accounting firm.
These audits can be complex and time-consuming, so it’s important to properly prepare for them. Here’s what you need to know about the 401(k) plan audit requirements.
What is a 401(k) audit?
A 401(k) plan audit is a review of your company's qualified plan by a third-party accounting firm to ensure the plan meets guidelines and regulations set by the IRS and the Department of Labor (DOL). Put simply, audits help ensure an employer is operating its plan correctly. They review the information provided on a plan’s Form 5500 and financial statements to verify accuracy.
Upon completion of a 401(k) plan audit, the employer and those involved in managing the plan may receive certain communications from the auditor, including an audit communication letter and a management recommendation letter. The employer can use these communications to both address areas of noncompliance and improve processes before future audits.
What are the 401(k) audit requirements?
A 401(k) plan is required to undergo an audit if it’s a “large” plan for Form 5500 purposes. Plans with more than 100 participants with a balance as of the first day of the plan year (including terminated participants with a balance remaining in the plan) must undergo an annual audit. These plans must also file certain financial statements with their annual Form 5500 filing.
DOL regulations include a special “80-to-120 participant rule,” which states that if the number of participants with a balance at the beginning of the year is between 80 and 120, and a Form 5500 was filed for the prior plan year, the plan may file a 5500 in the same category (small or large plan) as the year before. A plan that files a small filer 5500 for the plan year is not subject to the required large plan audit until it exceeds the 120 participant threshold at the beginning of a plan year.
Limited scope audits
Under ERISA Section 103(a)(3), there are two types of 401(k) plan audits: full-scope and limited-scope.
Full-scope audits: Require that the auditor review the plan recordkeepers' processes and procedures in addition to the plan’s operations.
Limited-scope audits: When conducting a limited-scope audit, auditors don’t audit investment information prepared and certified by a qualified institution such as a bank or similar financial institution as long as that entity certifies both the accuracy and completeness of the information. The auditor can include a disclaimer in its audit findings with respect to this information.
Auditors must comply with rules related to limited-scope audits under the Statement on Auditing Standards No. 136 (SAS 136). SAS 136 significantly revises the scope of a plan audit and requires employers to provide additional information and documentation to the auditors.
Employers sponsoring plans may continue to use limited scope audits. But under SAS 136, they are now referred to as "ERISA Section 103(a)(3)(C) audits" and no longer have a scope limitation. Instead of the auditor issuing a disclaimer of opinion, it now issues an opinion with two parts:
An opinion on the fair presentation of information in the financial statements that are not covered by the certification, and
An opinion on whether the investment information in the financial statements reconciles with information in the certification. Employers are required to provide written representations regarding their responsibilities. This includes keeping a copy of the plan document and amendments, ensuring transactions are consistent with the plan, and maintaining plan records used to determine benefits due under the plan.
Who performs an annual 401(k) audit
Audits must be performed by an independent auditor who does not have ties to the employer or the plan. This means that financial companies that manage recordkeeping, accounting, and/or financial statements for your business cannot perform your plan’s annual 401(k) audit, as they aren’t considered independent sources.
How much do 401(k) audits cost employers?
The cost of audits depends on different factors, including business size and audit type. According to some sources, annual audit costs range from $8,000 to $12,000 for small- to medium-sized businesses (plans with fewer than $50 million in assets)—although some audit fees have been as high as $18,000.
Limited scope audits require less review, so they’re often more affordable than full-scope audits.
How to properly prepare for a 401(k) audit
Taking the following steps to ensure a smooth 401(k) audit can save you a lot of time and trouble:
Make sure your documents are in order: The auditor of your 401(k) plan will ask you to provide numerous documents, including plan documents, payroll data, and time-stamped communications. Organizing your documents can help save time.
Use payroll integration to prevent errors: You can avoid a lot of problems during the 401(k) deposit review by integrating your payroll and record-keeping systems.
Want to know more about a 401(k) audit and how to prepare for it? Don’t hesitate to contact Human Interest.
Can small businesses afford to offer 401(k)s?
Traditionally, offering a 401(k) has been considered expensive for small businesses. Not anymore. It’s no longer necessary to spend thousands of dollars to implement a 401(k) plan.
For example, Human Interest retirement plan costs start at just $120 a month plus $4 per employee per month, providing an affordable option for small businesses. In addition, we have zero transaction fees, eliminating hidden costs that can add up, like fees charged when you choose to make changes to your plan.*
Both employers and employees receive tax benefits for contributing to a matched 401(k) plan. Employees can build their nest eggs tax-free, while employers enjoy tax credits and write-offs, lower employee turnover, and foster a more productive workforce. If you’re a small business, a low-fee retirement program can benefit your employees and your bottom line.
If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.
More advantages with a Safe Harbor Plan
With a Safe Harbor plan, you can get the benefits of both a traditional 401(k) and profit sharing plan.
* Applies to all transaction types. For non-rollover distributions, shipping and handling fees may apply to requests for check issuance and delivery.
Article By
Vicki WaunVicki Waun, QPA, QKC, QKA, CMFC, CRPS, CEBS, is a Senior Legal Product Analyst at Human Interest and has over 20 years experience with recordkeeping qualified plans, along with extensive experience in compliance testing. She earned her BSBA in Accounting from Old Dominion University and is a member of ASPPA.
