When does a 401(k) or other retirement plan require an annual audit?

The Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of plan financial statements by an independent qualified public accountant of plans subject to the provisions of ERISA. This requirement is applicable to plans with 100 or more eligible participants at the beginning of the plan year. Plans meeting this criteria would be considered to be a “large plan.”

Plans that are subject to ERISA are required to report certain information annually to federal government agencies, including the Department of Labor (DOL), the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC).

For many plans, the information is reported to the DOL on Form 5500, Annual Return/Report of Employee Benefit Plan, that includes financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and certain supplemental schedules.

Who are eligible participants?

An employee is eligible to participate in his or her employer’s retirement plan when he or she meets certain conditions stated in the plan document.

In a qualified plan, such as a profit sharing, 401(k) or defined benefit plan, generally employees would meet eligibility if they are:

  • At least age 21
  • Have at least 1 year of service

The employer must follow the eligibility rules in the plan document, which can be less restrictive than those listed above.

In a 403(b) plan, the “universal availability rule” is applicable which means if an employer permits one employee to defer salary in the plan, the employer must extend this offer to all employees of the organization.

The employer may exclude certain employees from the 403(b) plan:

  • Employees who will contribute $200 or less annually
  • Those employees who participate in a 401(k) or 457(b) or in another 403(b) plan of the employer
  • Nonresident aliens
  • Employees who normally work less than 20 hours per week
  • Students performing services described in the Internal Revenue Code Section 3121(b)(10)

Are there exceptions to the threshold of 100 eligible participants?

The 80-120 Rule allows a plan with between 80 and 120 participants, as of the 1st day of the plan year, to file Form 5500 in the same category (“large plan” or “small plan”) as indicated on the prior year Form 5500 filing. The number of participants determines a plan to be either a large plan or a small plan.

When is a plan pursuant to the Securities and Exchange Commission (SEC) reporting requirements?

The SEC requires employee stock purchase, savings and similar plans with interests that constitute securities registered under the Securities Act of 1933 to file a Form 11-K pursuant to Section 15(d) of the Securities Exchange Act of 1934.

Plans that are required to file Form 11-K are deemed to be issuers under the Sarbanes-Oxley Act of 2002 (SOX) and must submit to the SEC an audit in accordance with the auditing and related professional practice standards promulgated by the Public Company Accounting Oversight Board (PCAOB).

Although plans are audited in accordance with PCAOB standards for filing with the SEC, these plans are also required to be audited in accordance with generally accepted auditing standards (GAAS) for filing with the DOL.

What is the goal of a plan audit?

Plan sponsors fulfill their fiduciary responsibility of compliance when meeting the audit requirements of their retirement plan(s).

An audit may also provide insight as to the plan sponsor’s control environment of the plan processes or lack thereof may uncover operational errors or identify prohibited transactions. These occurrences should result in plan remediation and corrections providing the plan sponsor with success in administration and management of the plan.

Auditors consider several questions in their analysis, including:

  • Do all eligible employees have the same opportunity to participate?
  • Are assets of the plan fairly valued?
  • Have contributions to the plan been made in a timely manner?
  • Are accounts of the participants fairly stated?
  • Were benefit payments made according to the terms of the plan?
  • Were there any issues identified that may impact the plan’s tax status?
  • Have there been any transactions made that are prohibited under ERISA?

How are the audit results used by plan sponsors?

Audited financial statements, along with the auditor’s report, must be attached to the Form 5500 filing. Once the annual audit is complete, the plan administrator and those charged with governance receive various other communications. These communications can be used to help strengthen internal controls, correct any areas of noncompliance, improve processes and gain a deeper appreciation of its fiduciary responsibility.

How can I plan ahead?

401(k) and other retirement plans must adhere to various rules and limitations defined by the federal government as well as the employer as stated in the plan documents. It can be a challenge to make sure you are complying with all that is required. Talk with your plan administrator or accounting advisor to plan ahead and help determine when your 401(k) or other retirement plan will need an annual audit.

For more information on this topic, or to learn how Baker Tilly employee benefit plan specialists can help, contact our team.