401(k) Plan Audit Requirements

The Internal Revenue Service requires 401(k) plans to report their annual activity on Form 5500. In some cases, the plan sponsor must also submit an audit report with its annual return. The deadline for Form 5500 and any required audits is seven months after the last day of the plan year. The plan sponsor may file Form 5558 to request a one-time extension of two and a half months if more time is needed to complete the audit.

Size

401(k) plans with more than 100 eligible participants are required to attach an audit report and complete Schedule I of Form 5500. Eligibility is determined at the beginning of the plan year. All employees who are eligible to join the plan must be included, whether or not they have signed up. Former employees who still have an account balance must also be included in the participant count.

80 to 120 Rule

401(k) plans that vary between 80 and 120 eligible participants on a continual basis are exempted from certain IRS provisions. These plans may choose to handle the audit for the current tax year the same way they handled it in the previous year. For example, a plan that increased from 85 eligible participants to 110 may still file its current year's tax return without an audit because it did not need one the year before.

Scope

The auditor must verify the amounts of the employee deferrals into the plan and the employer's matching contributions. These contributions will be tested to make sure they did not exceed the maximum limit for the plan year. Distributions to former employees and the plan's investment statements must also be tested for accuracy. If the plan's trustee is a bank, trust company or insurance company that also holds its investments, the auditor may accept the trustee's certification of accuracy instead of examining the investment account statements. This exclusion only applies to the investment accounts held by the trustee. The auditor must still examine the investments held at any other financial institution.

Auditor Requirements

You must choose an independent auditor with no financial interest in the company or its 401(k) plan. You must use a public accountant who has been certified or licensed by a state regulatory agency. Your auditor should also have experience performing 401(k) audits and be aware of the latest Employee Retirement Income Security Act rules and tax laws.