To remain competitive in the market place, many companies will offer a 401K plan for their employees. Good for you! Of course, now you are saddled with managing the plan’s day to day activities and having to address the multitude of and ever changing regulatory requirements. One of these requirements is the potential need for a plan audit.
Large vs Small Plans
An audit is required for “large” plans but not “small” plans. Knowing the difference and your options is key. A small plan is defined as having less than 100 eligible participants and a large plan is defined as having 100 or more eligible participants. Pretty simple, right? Yes and no. The definition of eligible participants is important here. An individual may be eligible but not participating i.e. you may have a total of 75 people in your plan at the end of the year but there could be 80 more that could participate but have elected not to. The result would be 155 eligible participants and the requirement for an audit. Folks may have worked with you long enough and are old enough to join the plan but may forgo participation for a variety of personal reasons. Maybe they are already independently wealthy, maybe their spouse handles the retirement “stuff” or maybe they just need a jet ski; regardless of the reason some employees just don’t participate even though they can.
The 80-120 Participant Rule
There is an exception to the audit requirement for large plans called the “80-120 participant” rule. The idea here is that if your plan has less than 120 eligible participants at the beginning of the current plan year you can elect to be treated as you were in the previous year (as a small plan) and thus avoid an audit. This can continue until the year your plan has 120 or more eligible participants on day one of the plan year. At that point though, it’s audit time.
There is a lot of information to take in above but it’s important information to be aware of and understand. It will help ensure you are compliant with regulatory requirements while being conscientious about potential dollars spent.
Knowing the due dates is always helpful. If needed, your audit is included with the filing of your Form 5500. A Form 5500 is the tax form associated with your 401K plan that is due July 31st (or the next business day if the 31st falls on a weekend or federal holiday). You can choose to file an extension (Form 5558) by July 31st that will postpone the deadline for Form 5500 until October 15th (or the next business day if the 15th falls on a weekend or federal holiday).*
What to Look for in an Audit Firm
When the time comes to need an audit, be sure to select an audit firm with specific 401K and other employee benefit experience. These audits are unique and highly regulated thus having a firm that can not only detect errors but can identify the risk of potential issues before they happen should be the value you seek from your audit provider. Do your due diligence during your auditor selection process. Ask questions like:
- How many 401K audits does your firm perform?
- Is your firm a member of the AICPA Employee Benefit Plan Audit Quality Center
- Do firm members participate in employee benefit plan specific training?
Fun stuff, no doubt, but important to you ensuring your plan is a benefit that your employees and other participants can believe in and trust.
* These dates assume a plan on a calendar year end.