If your company is experiencing growth, then you may have considered the possibility that a first-time benefit plan audit is in your future. The truth is that not all companies are required to conduct an annual audit, but there are specific rules about who needs one and who doesn’t. If you are anticipating a first-time plan audit, you should become familiar with plan audit requirements and guidelines for compliance.
Who is eligible for an annual 401(k) plan audit?
A 401(k) audit assesses whether a plan is compliant with the Department of Labor (DOL), the Internal Revenue Service (IRS), and plan-related documents and whether the Form 5500 financial information is reported accurately per plan financial statements and disclosures. The Employee Retirement Income Security Act of 1974 (ERISA) requires that certain benefit plans be audited based on the number of eligible participants in the plan.; as such, a plan requires auditing by a third party when it meets either of the following conditions:
- More than 100 eligible participants on the first day of the plan year
- 120 eligible participants if the plan has not previously been audited, and 100 every year thereafter
Eligible participants are defined as any employees that meet eligibility requirements, even if they choose not to participate. This also includes any terminated or retired employees with balances in the plan on the first day of the plan year and any deceased employees with beneficiaries who either receive or are eligible to receive benefits.[1]
When are the deadlines for the audit?
The audit must be completed within seven months after the last day of the month that the plan year ends unless you choose to file an extension of the deadline for another two and a half months. For example, calendar year-end plans that end on December 31 must complete their audit by July 31 of the following year, unless they choose to extend the deadline to October 15. The extension may also be applied to the due date of financial statements.
What documentation do I need to prepare for the audit?
To conduct the audit, your independent auditor will likely request your plan-related documents first, among other things. These documents help the auditor gain an understanding of plan provisions and test operational compliance. As such, they should be updated and easily accessible to avoid any plan document failures, which are common errors in 401(k) plan audits. For a first-time plan audit, an auditor will want to see the extent of plan documents based on how long the plan has been in existence, i.e., the farther back the plan effective date, the more you should provide to the auditor. Such plan documents include the following:
- Executed plan document, as well as the current IRS determination or opinion letter
- Plan amendments
- Summaries of plan descriptions and material modifications
- 401(k) administrative committee minutes and board minutes related to the plan
- Agreements with plan custodian and recordkeeper
- Copies of previously filed Form 5500
- Copies of previous audited financial statements
- Copy of fidelity bond insurance
- Any additional correspondence or agreements for the plan
First-time 401(k) audits can seem overwhelming, but proper planning and preparation can help to alleviate the challenges that can accompany the audit. For more information about first-time plan audits, contact your Windham Brannon advisor or reach out to Anne Morris.
[1] The Department of Labor (DOL) has proposed to change the definition of eligible participants to those who have an account balance in the plan, rather than just meeting the eligibility requirements. The comment period for the proposed change ended on Jan. 31, 2022. Windham Brannon will provide any update to requirement changes as they are made final by the DOL.