Monitoring 401(k) Audit Requirements

April 27, 2022 by Jason Frick
Audit & Accounting

When plans reach a certain size, they are required to file the regular Form 5500 instead of the Short Form.  In addition, plans are typically required to be audited and those audited financial statements are to be attached when the longer Form 5500 is required.  The general requirement to file as a large plan is at the time the total number of eligible participants is 100 or more.  However, there are a few important factors to consider: 

  1. The definition of an eligible participant includes not only those individuals who are current employees participating in the plan, but also terminated/retired individuals that still have balances and current employees that are eligible to participate in the plan but are not currently participating.
  2. The measurement of total eligible participants occurs only at the beginning of the plan year, which is typically January 1st. Please be cognizant that some employees may become eligible on January 1st depending on your plan provisions.  As such, the total eligible participants may change from December 31 to January 1. 
  3. DOL regulations allow for flexibility when you are between 80 and 120 eligible participants. For example, if you are between 100 and 120 eligible participants at the beginning of the plan year, you are allowed to complete the form that was completed the previous year and therefore avoid the audit requirements.  Once the number of eligible participants exceeds 120 at the beginning of the plan year, this option no longer exists. 

While there have been preliminary discussions regarding potentially changing the definition of an eligible participant, no changes have been made.  In addition, U.S. Congress budget and tax proposals may require automatic enrollment of all eligible participants and/or other provisions in the future.  It is important to monitor and identify when an audit may be required to ensure you aren’t surprised in the future.  Please reach out to your Copeland Buhl representative or myself if you would like to discuss your specific situation.