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When does a 401k Plan Need an Audit?

October 30, 2023

Typically, new plans with over 100 eligible participants on the first day of the Plan year need an audit…but what about existing plans? We shed light on what triggers an audit here.

Recently we were engaged by a retirement plan that needed an audit for the first time. The Plan had been in existence for a few years when the third-party administrator contacted the Plan Administrator to say that the Plan would need an audit with this year’s Form 5500 filing. In a panic, we received a call from the Plan Administrator who called to ask for clarification on the audit requirements.

So, when is an audit needed?

Typically, an audit requirement is triggered when a retirement plan reaches 100 eligible participants (on the first day of the Plan year), which is considered a “large” plan.

The 80/120 rule is an exception to this general rule. The 80/120 rule allows plans with between 80 and 120 participants to file as a “small” plan (no audit requirement) if they filed as such in the previous year. This may allow a retirement plan to avoid the external audit requirement required of a large plan.

What has changed?

A recent change in regulations has been enacted to alleviate a reporting burden for small plans (typically plans with fewer than 100 participants).

Plan years beginning on or after January 1, 2023 will be subject to a new counting methodology for determining the eligible participant count. The new methodology will be based on the number of participants with account balances at the beginning of the plan year only (instead of the current method which includes eligible individuals who have not elected to participate and do not have an account).

Involuntary cash-outs—what you should know

Many Plan Administrators do not realize that allowing former employees to keep their balances in the Plan after separation may in fact cause the Plan to incur fees from the custodian and trigger the need for an audit. If your Plan document has an involuntary cash-out provision, you should revisit it and see if your Plan is complying with this provision.

An involuntary cash-out allows the Plan to distribute out the former employee’s vested balance to them without their written consent. If a former employee has a vested balance above the involuntary cash-out amount, you should consider contacting and encouraging them to roll over their balance into an IRA or a new qualified plan, if they are enrolled in one.

If you are a Plan Administrator or a fiduciary of a Plan, we urge you to review your Plan’s document or contact your current service providers to check on the Plan’s distribution provisions and also understand the Plan’s participant count as of 1/1 of each plan year. By addressing this issue early on, you may be able to save the Plan or the Plan Sponsor the cost of an audit.

When do audits need to be completed?

That hinges on completion of the Form 5500. The Form 5500, which requires the independent auditors’ report to be attached, must be filed by the last day of the seventh month after the plan year-end (with an option to extend the deadline for an additional two and a half months).

For instance, if your plan year ends on December 31 (calendar year-end), audits should be concluded and the Form 5500 filed by July 31 in the subsequent year, with the possibility of extending until October 15.

Questions? Contact us.

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