Does your 401(k) Need an Audit?

Some employee benefit plans are required to include an opinion from an independent qualified public accountant (IQPA), particularly when filing Form 5500 at the end of the year. The IQPA examines the benefit plan’s financial statements to ensure they are presented fairly and the reports are in conformity with Generally Accepted Accounting Principles (GAAP). Together, the IQPA opinion and the financial statements are often referred to collectively as the “audit report.”

What is the 100 participant rule?

Generally, employee benefit plans with 100 or more participants must include an audit report with Form 5500, “Annual Return/Report of Employee Benefit Plan.” These benefit plans include eligible but not participating employees, as well as separated employees with account balances. Any audit report filed for a policy that covers a group of 100 or more participants should use the “large plan” requirements.

Conversely, a filed audit report for a pension or welfare benefit plan that covers fewer than 100 participants at the beginning of the plan year should follow the “small plan” requirements. If your total participant count on the first day of the plan year is less than 100, it is not necessary to include an audit report with your Form 5500.

For the benefit plan to be exempt from this requirement, at least 95% of the plan assets must be “qualifying” plan assets. Also, any person who works with plan assets that don’t constitute as “qualifying” must follow ERISA guidelines for being bonded. Furthermore, the amount of the bond may not be smaller than the value of the “qualifying” assets of the plan.

Notably, there is a slight variation of the general rule that is commonly referred to as the “80-120 participant rule.” This rule means that if the number of participants falls between 80 and 120, and a Form 5500 was filed for the previous plan year, you may decide to complete the audit report in the same category (large or small plan) that you registered in the prior year.

What are the large-plan exceptions?

Generally, if a plan chooses to report as a large plan, the IRS requires the plan sponsor to file an audit report, but there are some limited exceptions to this requirement.

  1. Employee welfare benefit plans that are unfunded, fully insured, or a combination of both, don’t have to file an audit report. 
  2. Employee pension benefit plans that provide benefits exclusively through allocated insurance contracts or policies fully guaranteeing the payment of benefits also do not have to file an audit report.

Some welfare benefit plans aren’t required to include an IQPA opinion if:

  • The employer’s general assets are solely used to pay benefits
  • The plan provides benefits exclusively through insurance contracts or through a qualified health maintenance organization (HMO). This is true if the premiums are paid directly by the employer from its general assets or split between its general assets and employee contributions, or
  • The plan provides benefits partly from the sponsor’s general assets and partly through insurance contracts or a qualified HMO.

Additionally, if one plan year is equal to or fewer than seven months, the IRS will defer the audit requirement for the first of two consecutive plan years. However, it is still a requirement to provide the financial statement, and your audit report for the second year must include an IQPA opinion on both the previous short year and the second year.

Do you know the rules?

It is important to remember that failing to include a required audit could result in the plan facing a civil suit. However, you also don’t want to pay for an IQPA if you don’t need to. If this is the first audit of your employee benefit plan or you’re a seasoned veteran when it comes to this type of compliance, JLK Rosenberger can help. For additional information, call us at 949-860-9890 or click here to contact us.