401k audit employee benefit audits

What is a 401k Audit?

A 401k account is a retirement savings account, which takes its name from subsection 401(k) of the Internal Revenue Code. In this account, employees can choose to defer a portion of their earnings and not pay income tax on the money until it is later withdrawn in retirement.Earnings on contributions are not taxed until the funds are withdrawn. Employers may also choose to, and often do, match contributions that employees make.

As a business owner, you know that a 401k audit helps you retain your company’s top employees. However, with the expansion of your business come increased commitments. So, you may have wondered:

Does my company 401k plan need to be audited?
As your company grows, the number of retirement plan participants will increase as well, and your company 401k plan may require an audit as part of your Form 5500 tax return obligations.

Whether your company 401k plans needs an annual audit depends on the number of plan participants. An employee benefit plan or 401k or another type of benefit plan needs to be audited if the plan has 100 or more eligible participants.

This means that if you are the administrator of a company 401k plan with 100 or more active participants, you are legally required to obtain an independent audit for the plan as part of your annual tax obligations — with one important exception, which we’ll address in a moment.

Eligible Plan Participants

The following types of 401k plan participant are considered eligible and will be counted toward your 100-participant tax threshold:

Active —

Current employees covered under the plan (includes employees that are eligible but don’t currently participate in the plan).

Retired or separated —

Retired plan participants who either receive plan benefits or are entitled to receive said benefits.

Deceased —

Deceased former employees with one or more beneficiaries who receive plan benefits or are entitled to do so.

What Are the Benefits of a 401k Plan Audit?

Whether or not your 401k plan legally requires an audit, an audit provides two major benefits:
Helps protect plan assets from plan mismanagement.
Helps protect the plan administrator from financial penalties that may result from filing an incomplete or inaccurate Form 5500.
Ultimately, a 401k plan audit benefits you as the plan administrator by making sure the plan is well-managed and fulfills all legal obligations.