When Do You Need a 401(k) Audit?

As part of annual reporting and Form 5500 filing, 401(k) plans with a certain level of eligible participants are required to have an annual audit. Understanding when an audit is needed, what type of audit you need, and what that audit will entail can help keep your plan in compliance with IRS and Department of Labor requirements.

When is a 401(k) audit required?

Retirement plans with fewer than 100 eligible participants on the first day of the plan year can file a Schedule I with their annual Form 5500. If your plan is filing a Schedule I, it is considered a small plan —you are therefore not required to have an annual audit or attach an Independent Qualified Public Accountant (IQPA) report to your Form 5500.

If your plan has more than 100 eligible participants on the first day of the plan year, it is considered a large plan and you are required to file a Schedule H with your annual Form 5500. Filing a Schedule H requires attaching an audit report from an IQPA. If your plan had previously been filing a Schedule I (as a small plan), you do not have to file a Schedule H with an IQPA until your plan reaches over 120 eligible participants.

What type of audit do you need?

There are generally two types of audits your plan could have: an ERISA (Employee Retirement Income Security Act of 1974) Section 103(a)(3)(C) audit (“ERISA 103(a)(3)(C) audit”) or non-Section 103(a)(3)(C) audit (“ERISA audit”).

The ERISA 103(a)(3)(C) audit (formerly known as a limited-scope audit) allows plan management to elect to exclude from the audit certain investment information a qualified institution certifies. You and your auditor, at your direction, will rely on an asset certification from a qualified certifying party that the investments and related income in the plan are accurate and complete. This enables the auditor to not perform testing of the investments and related income — and therefore there is no opinion over investments and related income.

The other type of audit you may need is simply an ERISA audit (formerly known as a full-scope audit). Your auditor will not be relying on an asset certification, and instead will be performing full audit procedures on the investments held in the plan and related investment income. Your audit will include an opinion over the investments and related income.

Both types of audits are acceptable for including in your annual Form 5500 filing.

What happens in the audit?

Once you have determined what type of audit you need, Schedule H filers need to find an IQPA and get your audit completed by the Form 5500 filing deadline.

The IQPA will audit the plan’s financial statements, including procedures around investments (only in an ERISA audit, does not apply for ERISA 103(a)(3)(C) audit), eligibility, contributions, loans, benefit payments, administrative expenses, and other areas as deemed necessary. The audit procedures will not only be performed as required under Generally Accepted Auditing Standards (GAAS), but will also take into consideration certain requirements of ERISA.

Part of the audit procedures will include documenting and assessing the internal controls of the plan. Informally during the audit, and formally at the completion of the audit, your auditor may provide recommendations for improvements in internal controls, plan processes or procedures, resolutions for errors noted, and other matters. Your plan auditor will also provide other formal, required communications at the completion of the audit.

Once your audit is complete and your auditor has issued the final opinion on the financial statements, attach your IQPA’s report to your Form 5500 filing and electronically file your 5500.

How we can help

A 401(k) audit can offer beneficial insights that can lead to process improvements and stronger internal controls for your plan. CLA is one of the leading providers of employee benefit plan audits in the country, and we offer compliance and consulting services that can unlock opportunities for more comprehensive results.