March 4, 2019

Does your Business Need a 401(k) Plan Audit?

It’s important for businesses to be familiar with the 401(k) audit compliance rules before it’s time to file. Understanding the guidelines will prevent a situation in which a business only realizes a 401(k) audit is needed after its Form 5500 (annual report of employee benefit plan) is rejected.

Check the number of eligible employees
The first step in determining whether or not a 401(k) plan needs an audit is calculating the number of participants as of the first day of the plan year.

However, there’s a catch: employees are considered participants as soon as they have satisfied the plan’s specific eligibility requirements (i.e., having been an employee for a set number of days, worked a minimum number of hours annually, etc.), whether or not they have enrolled or elected to join.

Participant counts, all in all, include active employees and all eligible employees, along with terminated participants – such as separated, retired or deceased employees – that still have plan balances.

Understand the 80/120 Rule
If a plan files as a large plan, it must complete Schedule H, which requires an audit. Generally speaking, plans with 100 or more participants qualify as large plan filers, and plans with fewer than 100 participants are considered small plan filers.

However, under the 80/120 Participant Rule, you may continue to file the Form 5500 within the same category as in the previous year as long as there are between 80 and 120 participants at the beginning of the plan year. If, for instance, you filed as a small plan with 90 participants in 2017 and on January 1, 2018, the count grew 110, the plan could still file as a small plan in 2018 according to the 80/120 rule.

On the other hand, if the number of eligible participants reached 121, the plan would need to be filed as a large plan, and require an audit.

File by the Deadlines
For those plans requiring an audit this year, the audit must be attached and the complete Form 5500 must be filed electronically with the IRS by July 31. If needed, extensions are permitted under a few circumstances. For instance, filing extensions are automatic if a plan sponsor has a valid corporate return extension on file, which delays the deadline until September 15. The other option is to formally extend the Form 5500 itself, which yields an automatic extension until October 15.

To avoid the penalties for failing to complete the Form 5500 or ramifications of filing late, plan sponsors should take the time to understand the requirements for a 401(k) audit well in advance of the July 31 deadline.

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