401(k) Plan Audits: What Changes When Your Plan Reaches 100 Participants

For a growing business, crossing 100 employees is a milestone. For the company's 401(k) plan, it can also mean a new annual requirement: an independent audit of the plan's financial statements.

The audit is not a penalty for growth. It is part of how the Department of Labor oversees larger plans. But it does add cost and work, and many business owners are surprised by it. Understanding how the threshold works and how to prepare can make the first audit much less painful.

Why plans are audited

ERISA generally requires plans that file Form 5500 as large plans to engage an independent qualified public accountant to audit the plan each year. The auditor's report is attached to the Form 5500. If a required audit report is missing, the DOL can reject the filing as deficient, which can lead to penalties.

How participants are counted

For plan years beginning on or after January 1, 2023, defined contribution plans count participants with account balances at the beginning of the plan year. That includes current employees with balances, former employees who left money in the plan, and beneficiaries with accounts.

Before 2023, plans counted everyone who was eligible to participate, even if they never contributed. The change lowered the count for many plans and brought a number of them back under the audit threshold.

The practical effect: what matters is how many accounts the plan holds, not how many people the company employs.

The 80-120 rule

A plan whose count falls between 80 and 120 at the start of the plan year may generally file in the same category it used the year before. In practice, a plan that has been filing as a small plan can continue doing so until its count passes 120.

This rule gives growing plans breathing room. It also means the first audit may arrive later than a business owner expects, so it helps to watch the count each year.

Managing the count responsibly

Because former employees with balances count, plans with high turnover can reach the threshold faster than their headcount suggests. Some ways sponsors manage the count:

• Process small balance distributions for former employees on a regular schedule, if the plan document allows it.
• Remind departing employees of their options, including rolling money into a new employer's plan or an IRA.
• Keep contact information current so distribution notices reach former employees.

These steps should follow the plan's terms and apply consistently. They are good plan hygiene whether or not an audit is on the horizon.

What the auditor reviews

A plan audit typically looks at:

• Whether employee contributions and loan repayments were deposited on time
• Whether the plan used the correct definition of compensation for contributions
• Eligibility, enrollment, and vesting
• Distributions and participant loans
• Investments and their valuation
• Plan expenses paid from plan assets
• The accuracy of participant data

When a qualified institution, such as a bank or insurance company, certifies the plan's investment information, the plan can elect a type of audit under ERISA section 103(a)(3)(C) that relies on that certification. Without that certification, a more extensive audit of investments is needed.

Auditing standards updated in recent years also put more responsibility on plan management. Expect to acknowledge in writing your responsibilities for the plan and to provide certain documents and representations to the auditor.

Choosing an auditor

Selecting the auditor is a fiduciary decision. Plan audits are specialized work, and DOL reviews over the years have found quality problems in a meaningful share of them, especially among firms that perform only a few. Questions to ask include:

• How many employee benefit plan audits does the firm perform each year?
• Is it a member of the AICPA's Employee Benefit Plan Audit Quality Center?
• What did its most recent peer review find?
• Who will do the work, and how much benefit plan experience do they have?

Price matters, but an inexperienced auditor can cost more in the long run if problems are missed.

Timing and cost

Form 5500 is due by the last day of the seventh month after the plan year ends, which is July 31 for calendar-year plans. A two-and-a-half-month extension is available by filing Form 5558. Many plans schedule fieldwork in the spring or summer, so engaging the auditor early in the year helps.

Audit fees vary with plan size and complexity. If the plan document allows, reasonable audit fees can often be paid from plan assets, although many sponsors pay them directly.

A preparation checklist

• Track your participant count at the start of each plan year.
• Keep payroll records that show contribution withholding and deposit dates.
• Confirm your plan's definition of compensation and check that payroll follows it.
• Gather the plan document, amendments, and prior Form 5500 filings.
• Ask your recordkeeper whether it can provide a certification for the plan's investments.
• Engage the auditor well before the filing deadline.

Approaching 100 participants? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm helps business owners plan for audits and review plan operations. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

We have more than 100 eligible employees but only 70 with balances. Do we need an audit?

Generally, no. Under the current counting method, the plan counts participants with account balances at the start of the plan year. Confirm the count with your plan administrator each year.

Is the first audit harder than later ones?

Often, yes. The first audit usually involves testing opening balances and prior-year activity, which takes more work. Later audits typically build on that foundation.

What happens if a required audit is missed?

The Form 5500 may be treated as deficient, which can lead to DOL penalties. The DOL's Delinquent Filer Voluntary Compliance Program offers reduced penalties for late or incomplete filings that are corrected voluntarily.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.