A 401(k) plan’s audit requirement is based on the number of employees categorized as eligible participants every year. The DOL terms an employee benefit plan as a “large plan” and requires it to be audited in any year that it has over 100 eligible participants as of the beginning of the year. (See below for a discussion of participant eligibility.) The audit must be attached to the Form 5500, which must be filed by July 31st, unless extended to October 15th. As with many other government regulations, there are exceptions:
Exception 1 (Short Plan Years) – Partial plan years rejoice – even if it is classified as a large plan due to its size, if a 401(k) has a plan year lasting seven months or less (for example, if it started in August and is a calendar year plan), the audit can be deferred to the next plan year. If participation drops significantly the next year, and no audit is required, the short plan year will still have to be audited.
Exception 2 (The 80/120 Participant Rule) – If the eligible employee count is 121 or greater at the beginning of a year, the plan must be audited, no other options. However, if the count is anywhere between 80 and 120, that year’s requirement follows the prior year’s audit requirement. For example, in year 1, there were 90 eligible participants, so no audit was required. In year 2, eligible participants climbed to 115. While the plan was above the 100 eligible participants, because it was still less than 120, it could elect to file as a small plan again. In year 3, when eligible participants rose above 121, the plan will be required to have an audit.