401(k) plan audit

What a 401(k) plan audit is

ERISA requires “large” plans to attach a report from an independent qualified public accountant to Form 5500. Starting with 2023 plan years, the count is of participants with account balances on the first day of the plan year, not everyone who is eligible. A plan with 80 to 120 participants at the start of the year can file in the same category as the year before, so a small plan usually stays exempt until it passes 120.

Why it matters to employers

The plan administrator, which is usually the employer, hires the auditor, and choosing one is a fiduciary decision. The auditor tests things such as whether deferrals were deposited on time, whether eligibility and compensation rules were followed, and whether plan records agree with payroll. The audit has to be finished before Form 5500 is filed, seven months after the plan year ends, or 9½ months with an extension.

Example

A plan starts 2026 with 112 participants with balances and filed as a small plan for 2025. Under the 80 to 120 rule it files as a small plan again, with no audit. It starts 2027 with 125, so the 2027 plan year needs an audit.

Common mistakes

• Counting everyone who is eligible when the test is participants with balances.

• Forgetting that former employees with balances count. Paying out small balances under the plan’s cash-out rule lowers the number.

• Hiring an auditor with little employee benefit plan experience.

• Starting the audit too close to the Form 5500 deadline.