Does Your Company Need a 401(k) Audit?

What is a 401(k) Audit?

A standard 401(k) audit for a company generally involves a thorough review of the company's 401(k) plan by a third-party accounting firm. The review will determine whether the company's 401(k) plan is in compliance with all applicable IRS and Department of Labor regulations. In addition to ensuring compliance with government regulations, an audit can also verify that a company’s 401(k) plan is structured properly for the benefit of all company employees.

Some of the issues explored in a 401(k) audit include reviewing any amendments made to the plan throughout the year, analyzing the accuracy of financial statements, confirming the propriety of all distributions and rollovers made during the year, spot review of financial transactions involving the plan and interviewing top management to vet any concerns with the plan.

When Are You Required to Complete a 401(k) Audit?

The requirements for a 401(k) audit are established by the Employee Retirement Income Security Act (ERISA), including whether your company is required by law to complete an annual audit. For those companies with 100 or more eligible employees plan from the beginning of the plan year, a third-party 401(k) audit is required. The 100-employee threshold for required annual audits takes into account any eligible employee even if they have not contributed to the company's plan as well as former employees who have funds invested in the plan. There are complex exceptions to this threshold, and a company may elect to defer the audit for one year.

The IRS tracks a company's completion of an annual audit via the third-party plan audit report that accompanies the company's annual Form 5500. There is a long and short version of Form 5500, and the particular version required for a company depends on the number of eligible employees for their 401(k) plan. The deadline for filing the third-party audit report along with the Form 5500 is the last day of the seventh month after the end of a company's plan year. While most 401(k) plans establish the end of the calendar year as the end of their plan year, this is not always the case. For those plans that follow the calendar year, the standard due date for filing a company's third-party audit report and Form 5500 is July 31.

For questions about whether your company is required to complete a 401(k) audit and navigating any applicable exemptions, it is prudent to consult with an accounting firm that is experienced with 401(k) audits.

What Happens if Your Business Does Not Complete a 401(k) Audit?

Failure to timely file a third-party 401(k) audit report and Form 5500 can result in steep monetary penalties imposed by both the IRS and the Department of Labor. The IRS calculates late penalties at $25 per day past the filing deadline. Companies can face a maximum penalty of $15,000 from the IRS for unauthorized delays in filing the required forms. Keep in mind that there is no limit on the late penalties that can be imposed on a company by the Department of Labor, which determines the amount of the per diem penalty according to the size of the company's 401(k) plan. Daily penalties from the Department of Labor can climb to as much as $1,100 per day.

Companies are advised to begin the annual audit process as early as possible, but there are several options available to minimize late penalties. With Form 5558, a company can secure a one-time filing extension of 2.5 months. Another possible option is to register for the Department of Labor’s Delinquent Filer Voluntary Compliance Program (DFVCP). If a company qualifies for the DFVCP, then late filing fees from the Department of Labor could be reduced to as low as $10 per diem. The IRS typically also waives or reduces late penalties for companies that have enrolled in the DFVCP for that filing year, but the company must file a Form 9855-SSA first. For late-filers, their enrollment in the DFVCP is only possible if the company has not already received written notice of their failure to timely file an annual report.

Final Thoughts on a 401(k) Audit for Your Company

In sum, ensuring that a company meets the threshold for a 401(k) audit, properly examining the company's plan and related filings, timely conducting the required audit, filing the appropriate forms and recommending corrective measures for any compliance issues are all vital components of a 401(k) audit. Companies are wise to consult with an experienced and reliable third-party accounting firm to assist with this intricate process as early in the plan year as possible. Primarily, an effective third-party 401(k) audit is extremely valuable in avoiding late penalties and proactively correcting any compliance concerns.