As your business grows, you start hitting exciting milestones, some of which come with new regulations. One thing that tends to catch employers off guard is the 401(k) audit requirement, a key compliance step that can sneak up on plan sponsors who aren’t expecting it. Understanding the 100-participant threshold and what it means for your business can help you prepare for the changes it will bring.
What Is the 100‑Participant Threshold?
The 100-participant threshold refers to having 100 or more eligible 401(k) plan participants, not total employees. Reaching this mark means that the Department of Labor (DOL) requires you to do an annual independent audit of your plan and file Form 5500.
The DOL defines participants as individuals who have an account balance in the defined contribution plan at the beginning of the plan year. This includes active part‑time employees and terminated employees with balances. Also, you still must do a 401(k) audit if you drop below 100 participating employees during the year because the count on the first day of the plan year is what triggers the audit requirement.
When is a 401(k) Audit Required?
In general, plans with more than 100 participants must file Form 5500 with an attached audited financial statement annually. Under ERISA Section 103(a)(3)(C), if your plan assets are held by a qualified financial institution, you have the option to choose an audit type that lets your auditor rely on certified investment information. On the other hand, if your plan’s assets aren’t with a qualifying institution or you decide you want everything covered, you’ll need a full-scope audit instead.
The 80-120 Rule
If your plan has between 80 and 120 participants, you might not need an audit as long as you didn’t need one last year. Under the 80-120 rule, if you filed as a small plan before and you still have fewer than 121 participants with account balances, you can keep filing as a small plan and skip the audit. But once you hit more than 120 participants with balances, you’ll probably have to file as a large plan and get an audit.
This rule cuts down on the burden for plan sponsors who have gone back and forth from small to large plans. To stay compliant, you need to understand accurate participant counts and which rules apply to your plan.
What a 401(k) Plan Audit Involves
When your 401(k) plan hits the audit threshold, it might sound intimidating, but an experienced team like Mowery & Schoenfeld’s can make the process straightforward. Here are the steps in a typical 401(k) plan audit:
- Review of your plan: The first step is looking at how your current plan is set up and identifying potential risks.
- Analysis of plan management and external providers and systems: The next step is looking into your internal controls and reports from your recordkeeper and payroll provider.
- Testing financial activities: The audit continues with reviewing your plan administration, like how contributions are processed and deposited, whether benefit payments and loans are handled correctly, and how participant data is managed.
- Preparing financial statements: Next comes the preparation of financial statements and management letters.
- Form 5500 review and coordination with plan administrators: Your auditors check Form 5500 for accuracy and ensure the deadline is met.
Common Challenges and How to Prepare Before You Cross the Threshold
As your business grows and you approach the 100-employee mark, it’s smart to get ahead of some common hurdles. Many companies find themselves scrambling because they’re not ready or don’t have their documentation in order. By staying organized and knowing what’s expected, you can take a lot of the stress out of that first audit experience.
One challenge for businesses is coordinating data between payroll providers and recordkeepers. Double-check that your participant data matches across all systems to make the process easier.
Timing is another potential issue, especially with tight Form 5500 filing deadlines. Setting reminders and mapping out your workflow in advance means you won’t be rushing to submit your forms on time.
Here are some best practices you can start adopting before you reach the audit threshold to set yourself up for success:
- Tracking participant counts accurately
- Reviewing your internal controls
- Coordinating with service providers well in advance
Taking a proactive approach makes the audit process smoother with fewer hiccups.
Work With an Experienced 401(k) Audit Firm
When you’re seeking out a team to audit your 401(k) plan, don’t just settle for any provider. Look for a partner with vast experience with 401(k) plan audits. Mowery & Schoenfeld makes sure you’re following all the compliance rules under the Employee Retirement Income Security Act (ERISA), so you avoid headaches like DOL penalties if things aren’t done correctly.
The 401(k) plan audit requirement is a sign of business growth. While a new compliance requirement can be difficult to navigate, seeking guidance early helps you stay organized, avoid last-minute surprises, and ensure your documentation and processes are ready for a smooth audit experience. Reach out to our team of employee benefit plan audit professionals for help preparing for your audit milestone.