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What is a 401(k) Plan Audit?

If an audit of your 401(k) plan is required, Betterment can help you understand what to expect and how to prepare.

Articles by Mikang Kim, QKA
By Mikang Kim, QKA Operations Manager, Betterment for Business Published Jul. 07, 2020
Published Jul. 07, 2020
4 min read

The Employee Retirement Income Security Act of 1974 (ERISA) requires that certain 401(k) plans be audited annually by a qualified independent public accountant subject. The primary purpose of the audit is to ensure that the 401(k) plan is operating in accordance with Department of Labor (DOL) and Internal Revenue Service (IRS) rules and regulations as well as operating consistent with the plan document, and that the plan sponsor is fulfilling their fiduciary duty.

A 401(k) plan audit can be fairly broad in scope and usually includes a review of all of the transactions that took place throughout the plan year such as payroll uploads, distributions, corrective actions, and any earnings that were allocated to accounts. It will also include a review of administrative procedures and identify potential areas of concern or opportunities for improvement.

When does a 401(k) Plan need an audit?

Whether or not your plan requires an audit is determined by the number of participants in your plan at the beginning of the plan year. In this case, participants include not just those employees actively contributing to the plan but also those who were eligible but not participating as well as any terminated participants with a balance.

Generally speaking, ERISA requires an audit for any plan that had 100 or more participants (so-called “large plans”) at the beginning of the plan year. However, as shown in the table below, there are exceptions to this general rule, captured in the “80-120 Participant Rule,” to address plans that may have fluctuating participant counts close to that 100 cut-off.

Participant Count at Beginning of Plan Year Filing Status on Previous Year’s Form 5500 80-120 Participant Rule
100-120 participants Small Plan Considered a Small Plan (no audit required) until plan has more than 120 participants
80-100 participants Large Plan Considered a Large Plan (audit required) until plan has fewer than 80 participants

It is therefore important to review the plan’s eligible participant count before engaging an auditor, especially if the participant count fluctuates between 80 and 120.

If your plan falls under the large plan filer category, engaging a qualified independent auditor as soon as possible after plan year end is advisable.

How do I prepare for a 401(k) plan audit?

To get started, an auditor will request all plan-related documents, which will likely include:

  • Executed plan document or an executed adoption agreement
  • Any amendments to the plan document
  • Current IRS determination letter (these are attached in the plan document we provide for plan sponsors to execute)
  • Current and historical summary plan description and summaries of material modifications
  • Copy of the plan’s fidelity bond insurance
  • Copy of the most recent compliance test performed
  • Service agreements

In general, these documents should be easily accessible and current. That’s why it’s important for plan sponsors to safely keep all applicable plan-related documents, especially if there are changes made.

In addition, the auditor will need financial reports of your plan. As part of its 3(16) fiduciary support services, Betterment provides a full audit package which includes:

  • Participant contribution report
  • Plan activity report
  • Payroll records
  • Schedule of plan assets
  • Distributions and/or loans report
  • Fees report
  • Reports regarding investment allocation of plan assets
  • Copies of prior Form 5500 (available on eFAST within the DOL website)
  • Trustee certification/agreement

It’s also possible that the auditor may request copies of the committee or board minutes that document considerations and decisions about the plan, including choosing service providers and monitoring plan expenses.

What will happen during a 401(k) plan audit?

Once the auditor receives all the necessary documents, they will review the plan to gain a solid understanding of the plan’s operations, internal controls and plan activity. The auditor will pick a sample of employees for distributions, loans or rollovers (activity of assets moving out or in of plan) and will request documentation that support such activity. For example, this may include loan applications, distribution paperwork and the image of the check or proof of funds being delivered to the participant.

Once the assessments of the samples and financials are complete, the auditor will draft something called an “accountant’s opinion.” The plan sponsor should carefully review this document, which outlines any control deficiencies found during the audit. The auditor will also provide a final financial statement that must be attached to the plan’s Form 5500 before filing with the DOL.

Important Deadlines for 401(k) Plan Audits

Annual audits should be completed before the Form 5500 filing deadline. Form 5500s are required to be filed by the last day of the seventh month after the plan year ends. For example, if your plan year ends on December 31, your Form 5500 is due on July 31 of the following year. However, you may file an extension with the DOL using Form 5558 to get an additional 2 ½ months to file, pushing the due date to October 15 for calendar year plans.

It’s important to meet the required deadline to avoid any DOL penalties.

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