What you need to know about the IRS annual 401(k) audit requirement

8 MIN READEditorial Policy

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). 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. Starting with the 2023 plan year, this means plans with more than 100 eligible 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 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. 

Starting on December 15, 2021, auditors must comply with new 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. It also 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:

  1. An opinion on the fair presentation of information in the financial statements that are not covered by the certification, and

  2. 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 that 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:

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 $5 per employee per month—less than half the cost of your typical 401(k) provider. 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. We aim to make our plans affordable to employees as well. In fact, with a combined 0.57% annual cost¹, a Human Interest plan is less than half of the national average for investment expenses of 1.6%².

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.

Vicki 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.

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Investment advisory services are offered through Human Interest Advisors LLC, a Registered Investment Adviser and subsidiary of Human Interest Inc. An investment advisory fee is paid to Human Interest Advisors (HIA) of 0.01% of plan assets and a separate fee for recordkeeping services and custody-related expenses is paid to Human Interest Inc. (HII) of 0.05% of plan assets. Both fees are deducted on a monthly basis from the employee's account according to the HII and HIA Terms of Service. All prices are exclusive of applicable taxes. If the plan sponsor elects to hire an external investment advisor, the plan sponsor will pay such advisor as agreed between the plan sponsor and advisor. For more information, please see our pricing page. Similar services may be available at a lower cost from other vendors. Average fund fees as of 3/31/24. Asset-weighted average of mutual fund annual operating expenses ("expense ratio") for all plan participants invested in Human Interest Advisors' Model Portfolios ("Models"). Provided for illustrative purposes only. Actual, average fund expenses a participant experiences vary based on the specific Model selected, allocation changes to Models, whether participants opt out of Models and choose their own investments and allocations, or allocation drift, especially in volatile markets. Model allocations and underlying mutual fund expenses are subject to change. Before investing, carefully review the fund’s prospectus, which includes, among other things, a description of fees and expenses a fund will charge.


The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in total assets is 1.6% of assets, according to the 23rd Edition of the 401k Averages Book, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees, or any other asset based charges.