Does Our Company Need a 401(k) Audit?

By Mary Kathryn Treusdell

The short answer is: it depends on the number of eligible participants at the beginning of the plan year.

For companies that offer any type of pension or welfare benefit plan covered by the Employee Retirement Income Security Act of 1974 (ERISA), the plan is required to file either a Form 5500-SF (short form) or Form 5500. If the plan has generally less than 100 eligible participants at the beginning of the plan year, they can file the Form 5500-SF and do not require an audited financial statement accompanying the return. If they have in excess of 100 eligible employees, they are considered large plans and must have an audit by a Certified Public Accountant.

80-120 Rule
Sometimes plans can fluctuate around 100 participants. If we followed the general rule without exception, plans could be a small plan one year and a large plan the following year, back and forth, which could be troublesome for plan sponsors due to the associated audit requirements. The DOL provided an exception to the general rule in DOL Reg. 2520.103-1 (d), which states “if a plan has between 80 and 120 participants as of the beginning of the plan year, the plan administrator may elect to file the same category of annual report that was filed for the previous plan year.” Thus, if a plan was a small plan in one year and the following year, they had 115 eligible participants, they could elect to file the same category (small plan) even though they had more than 100 eligible participants.  Likewise, if a plan filed as a large plan in one year, and in the next had less than 100 eligible participants at the beginning of the plan year, they could elect to file as a small plan.

Typically plan administrators (third party or in-house) keep a watchful eye on the total number of eligible employees at the beginning of the plan year, and they notify the plan sponsor when they have hit the max number that requires an audit. However, it is always beneficial for plan sponsors to know the rules so that they can begin interviewing accounting firms sooner rather than later to make sure they have the best, most-experienced service provider.

Please contact Mary Kathryn Treusdell, CPA at Hall Albright Garrison and Barnes, P.C. mtreusdell@hallalbright.com if you have any questions or would like a 401(k) audit quote.