401(k) Benefit Plan Audits: What You Need to Know

It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand when you’ll need an audit and what to expect during the process.

When to Begin: Understanding the 80-120 Rule

Form 5500

If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year.  Participants include people in the following four categories:

  • Active participants are your current employees that are covered by the plan. To qualify for this group, an employee doesn’t have to be contributing to the plan, they just need to have met the plan’s eligibility requirements.
  • Separated or retired employees who are currently receiving benefits.
  • Separated or retired employees who are entitled to future benefits. Essentially, these are former employees who still have balances in the plan but are not yet receiving benefits.
  • Beneficiaries of deceased participants.


Following the 80-120 Rule

If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.

For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.

The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.

While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.

How to Prepare: The Basics

To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:

  • 401(k) plan documents, amendments and any other agreements that govern the plan.
  • Annual reports prepared by the plan’s custodian and/or record keeper, which could include reports of plan asset balances and transactions, loans, distributions, contributions and others.
  • Payroll and personnel data.
  • Your audit team will notify you of any additional documents or requirements needed based on your specific plan.

Outcomes: What to Expect

In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.

At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon.  Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared.