Complying with the audit requirements of a 401(k) plan

When the total number of eligible participants in a 401(k) plan reaches 100, federal law requires that an annual audit of the benefits and contributions be made. There are three different types of participants considered to be eligible:

  • Active: These are people that are currently on the payroll of the plan sponsor, that are covered by the plan and receiving credited service. Active participants include all people who are eligible but not participating in the plan.
  • Retired or separated employees: These are people that at one time were employees of the plan sponsor and are currently receiving benefits or are entitled to them.
  • Deceased: These are individuals who have died and have beneficiaries receiving benefits or are entitled to them.

The total number of eligible participants is very important. One of the 401(k) audit requirements is that once a plan reaches 100 participants the administrator of the plan must engage the services of a third party CPA firms to independently audit the plan. The results of the audit are filed with the IRS.

The objective of a 401(k) audit is to give an unbiased opinion on the financial data of the plan and to ensure that all material aspects of the plan are fair. During the course of the audit, the auditors must work against specific 401(k) audit requirements and procedures, this ensures that the audit complies with all government regulations as well as any and all requirements specified within the plan. During the audit, the auditors consider a number of questions:

  • Can all eligible employees participate if they wish to?
  • Are the plan assets valued fairly?
  • Have all plan contributions been credited to the plan in a timely manner?
  • Are the accounts of the participants in the plan correct?
  • If benefit payments have been made, were they made in accordance with the terms of the plan?
  • Are there any issues that might have a material effect on the tax status of the plan?

There are two different types of audits that can be carried out on 401(k) plans. A full audit is necessary when the plan custodian has failed to provide certification on the investments held by the plan. A full scope audit is considerably more detailed than a limited audit as the auditor who is doing the work will have to subject the investments held by the custodian to a test. Limited scope 401(k) audit requirements allow the auditor to rely on information given by the custodian.

If your company has a 401(k) plan and employs 100 or more eligible participants then there are 401(k) audit requirements that you must adhere to, one of which is the employment of a third party CPA firm. You are invited to contact Cook Martin Poulson, P.C. for further information.

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