A 401(k) plan helps employees save for retirement, but it also brings important compliance responsibilities for employers. One of the most critical requirements for growing businesses is the 401(k) audit. This article explains what a 401(k) audit is, when it is required, how the audit process works, and how employers can prepare without stress.
What Is a 401(k) Audit
A 401(k) audit is an independent review of a company’s retirement plan performed by a certified public accountant. The audit confirms that the plan is being operated correctly and follows all required rules. It focuses on participant data, payroll records, contributions, distributions, loans, investments, and financial reporting.
The purpose of the audit is to protect employees’ retirement savings and ensure the employer remains compliant with federal regulations.
When a 401(k) Audit Is Required
A 401(k) audit becomes mandatory when a plan reaches a certain size. Most plans must be audited when they have 100 or more eligible participants at the beginning of the plan year.
Eligible participants include:
- Employees actively contributing
- Employees eligible but not contributing
- Former employees with plan balances
There is a special rule called the 80–120 rule. If a plan has between 80 and 120 participants and previously filed as a small plan, it may delay the audit requirement for one year. Once the plan exceeds 120 participants, an audit is required every year.
Why 401(k) Audits Are Important
401(k) audits are not just a legal requirement. They offer several benefits:
Employee Protection
Audits verify that contributions are deposited correctly and on time, and that participant accounts are accurate.
Regulatory Compliance
The audit ensures the plan follows government regulations and its own written rules.
Operational Improvement
Auditors often identify weak areas in payroll, HR processes, or plan administration.
Penalty Prevention
Failure to complete a required audit can lead to fines, delayed filings, and regulatory penalties.
The 401(k) Audit Process
Understanding the audit process helps reduce confusion and delays.
Audit Planning
The auditor reviews the plan document, eligibility rules, and administrative procedures. This stage helps the auditor understand how the plan operates
Document Collection
Employers must provide various documents, including:
- Plan documents and amendments
- Summary Plan Description
- Employee census data
- Payroll records
- Contribution reports
- Loan and distribution records
- Investment statements
- Prior filings
- Service provider agreements
- Fidelity bond coverage
Well-organized records make the audit faster and smoother
Compliance Testing
Compliance testing checks whether the plan follows its rules. This includes:
- Employee eligibility
- Contribution accuracy
- Timely deposits
- Loan compliance
- Hardship withdrawals
- Vesting schedules
- Distribution accuracy
Any errors found during testing must be corrected.
Financial Review
The auditor examines the plan’s financial statements to confirm that assets, expenses, and participant balances are accurate.
Internal Control Review
Internal controls help prevent errors. The auditor reviews payroll processes, approval procedures, and data management systems
Audit Report
After completing all testing, the auditor issues a final audit report. This report must be included with the annual Form 5500 filing.
How Employers Can Prepare for a 401(k) Audit
Preparation is the key to a smooth audit.
Start Early
Begin organizing documents months before the filing deadline.
Maintain Accurate Records
Clean payroll and employee data reduce audit issues.
Review Plan Operations
Ensure contributions, loans, and distributions follow plan rules.
Communicate With Providers
Coordinate with payroll, HR, and plan administrators.
Fix Issues Promptly
Correct errors as soon as they are identified.
Common Problems Found in 401(k) Audits
Auditors frequently discover:
- Late employee contributions
- Incorrect employer matching
- Eligibility mistakes
- Vesting errors
- Loan repayment issues
- Missing documentation
Regular internal reviews can prevent these problems.
Audit Deadlines
For most calendar-year plans:
- The annual filing deadline is July 31
- An extension moves the deadline to October 15
The audit must be completed before the filing is submitted.
Conclusion
A 401(k) audit is an essential part of managing a compliant retirement plan. While it may seem complex, proper preparation and strong internal controls make the process manageable. A successful audit not only meets legal requirements but also strengthens employee trust and improves plan administration.
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