Auditing 401(k) Plans

Large Plan

Large Plan

A “large” 401(k) plan must file an audit with the DOL and the IRS with it’s annual Form 5500.  Generally, a plan is considered a “large” plan if it had 100 participants or more at the beginning of the plan year (subject to the 80-120 rule).  The audit must be performed by an independent  qualified public accountant.

 

 

 

 

 

 

 

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80-120 Rule

80-120 Rule

Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category of Form 5500 it filed the year before. This is most applicable when a plan filed as a “small” plan in the prior year but the number of participants at the beginning of the current plan year is between 100 and 120. The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.

 

 

 

 

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Small Plans

Small Plans

Generally, a plan is considered a “small” plan if it had less than 100 participants at the beginning of the plan year (subject to the 80-120 rule).  Under certain conditions, a “small” plan may not use the audit waiver and will have to be audited.  See the information below.

 

 

 

 

 

 

 

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  • 401(k) Plan Audit Requirement

  • You should know…

    A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I.
    The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    Quality audits for 401(k) plans are imperative, not only because they help ensure plan compliance for the benefit of the participants, but quality audits are important because the DOL can reject the annual Form 5500 filing when the DOL determines an audit failure has occurred.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Common audit deficiency - testing of payroll data is insufficient.
    Common audit deficiency - no audit work performed for related parties.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    Common audit deficiency - failure to test employee deferrals.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    Common audit deficiency - no audit documentation for testing participant data.
    ”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
    The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit.
    Common audit deficiency - no testing of investment income allocation to participants.
    Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category (Schedule H or Schedule I) of form 5500 it filed the year before.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.
    Common audit deficiency - inadequate or missing disclosures.
    Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year.
    Common audit deficiency - failure to test timeliness of participant contributions
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.
    Common audit deficiency - no audit work performed for benefit payments.
    “Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
    Common audit deficiency - no audit work performed for contributions.
    The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.

401(k) Plan

The Audit Requirement

Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500). The plan will file as either a “large” or “small” plan based upon the number of eligible participants. A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I. A “large” plan must also file an audit conducted by an independent auditor with the Form 5500.

Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year. However, this general rule is subject to the “80-120 rule” (DOL reg. 2520.103-1(d)). Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category of form it filed the year before. This is most applicable when a plan filed as a “small” plan in the prior year but the number of participants at the beginning of the current plan year is between 100 and 120. The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.

Also, “large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement. As well, plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.

Under certain conditions, a “small” plan may not use the audit waiver and will have to be audited. To use the audit waiver the following conditions must be met:

  • If more than 5% of the assets are nonqualifying plan assets then any person who handles the nonqualifying plan assets must be covered by a fidelity bond (and the amount of the fidelity bond must be at least equal to the value of the related assets).
  • The summary annual report must contain the required disclosures.
  • If requested by a participant or beneficiary, the plan administrator, must make available for examination without charge, or upon request furnishes copies of, each regulated financial institution statement and evidence of any required bond.

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