What to Expect During Your First 401(k) Audit: A Guide for Business Owners

As your business grows, so do your responsibilities, including compliance with regulations related to your company’s 401(k) plan. If your business has reached the threshold requiring a 401(k) audit, you may be wondering what to expect. This guide will walk you through the process, helping you understand the requirements, timeline, and key steps involved.

When Is a 401(k) Audit Required?

Generally, businesses that sponsor a 401(k) plan with 100 or more participants are required to have an independent audit as part of their annual Form 5500 filing. However, the Department of Labor (DOL) provides a “80-120 participant rule,” allowing plans with between 80 and 120 participants to follow prior year filing requirements.

Preparing for the Audit

Preparation is key to ensuring a smooth audit process. To get started, gather the following documents:

Plan Documents and Amendments – This includes the original plan document, any updates, and summary plan descriptions.

Employee Census – A detailed list of all employees, their date of birth, date of hire, date of termination, eligibility status, current year contributions, account balances, and gross compensation.

Payroll Records – Payroll registers, W-3, documentation of salary deferrals, employer contributions and remittances.

Trustee and Investment Statements – Reports detailing plan assets, transactions, and investment performance.

Compliance Testing and Prior Filings – Any nondiscrimination testing results and prior Form 5500 filings.

The Audit Process: What to Expect

Once the audit begins, the independent auditor will review the plan’s governing documents, internal controls, operations and financial reporting. Key areas of focus include:

Employee Eligibility and Contributions – Ensuring participating employees are eligible to participate based on the plan document and nonparticipating eligible employees have been given the opportunity to participate. Confirming employee contributions align with employee elections and payroll records.

Employer Contributions – Verifying that employer matching and profit-sharing contributions comply with the plan document and align with payroll records.

Timeliness of Deposits – Confirming that employee contributions are deposited promptly, as required by DOL regulations.

Plan Expenses and Fees – Reviewing administrative fees and ensuring they are reasonable and properly allocated.

Compliance with Plan Provisions – Ensuring adherence to plan rules and government regulations.

How Long Does the Audit Take?

A typical 401(k) audit takes several weeks, depending on the complexity of the plan and the availability of requested documents. Promptly providing accurate records can help streamline the process.

Common Challenges and How to Avoid Them

Incomplete or Disorganized Records – Keeping well-organized records throughout the year can prevent delays.

Late Contributions – Ensure all employee contributions are deposited on time to avoid compliance issues.

Plan Document Noncompliance – Regularly review plan documents and operations to confirm alignment.

Final Steps and Filing

Once the audit is complete, the auditor will issue a report, which is submitted with your Form 5500 filing. Addressing any findings proactively can help prevent future issues and ensure ongoing compliance.

Need Assistance?

Navigating your first 401(k) audit can be challenging, but you don’t have to do it alone. Our team at Newburg CPA has extensive experience helping businesses through the audit process.