401(k) Plan Audit Requirement

June 4, 2024 by Gordon Advisors

Is your 401k defined contribution plan required to have an audit?

Maybe “yes” last year, or for as long as you can remember, but maybe “no” for the plan year-end December 31, 2023. A big change is here, and we see its impact now: We expect about 20% of plans requiring an audit for plan year 2022 will no longer need an audit for plan year 2023.

How are participants counted for annual plan reporting?

In general, plans that cover less than 100 participants at the beginning of the plan year file their Form 5500 as a “small plan”, which does not require an audit. Plans covering 100 or more participants generally file as a “large plan”, which requires audited financial statements. Before 2023, 401(k) plans were required to count all eligible participants, regardless of whether they had an account balance. However, the new methodology effective January 1, 2023 re-defines participants as only those with an account balance. Therefore, as long as 2023 is not your first reporting year, use the number required to be entered on 2023 Form 5500 line 6g(1) to determine whether or not your plan must file as a large plan for 2023; if this number is less than 100, verify its accuracy then consider your options.

If your plan is not required to have an audit, should you have an audit anyways?

Plans can choose to have an audit, even if one is not required. Here are a few reasons why you may choose to continue with an annual audit:

If your plan falls just below the minimum participant count that requires a plan audit, consider whether you expect future growth that may boost the participant count back above the audit requirement threshold. If so, an audit in a future year will include testing beginning balances, which effectively means auditors must perform sufficient audit work on prior years in order to report on the future year under audit. By pushing off the audit in current year, you will be increasing the work – and audit cost – for future years.
Independent auditors assess the risks associated with taking on new clients. Existing plans that were not audited the previous year are generally higher risk; therefore, it may be more challenging – and costly – to find a good, qualified auditor when your need arises in the future.
Audit fees have been increasing as a result of new audit requirements. As new auditing standards roll out, the amount of work required by auditors increases, which increases the cost to the firm and is reflected in higher fees. However, you may have a lower-than-average fee arrangement based on years of history and mutual expectations of a smooth audit process with your current auditor. If this is the case, you may consider continuing your positive working relationship for the benefit of the plan, as well as to avoid searching for an independent auditor and re-negotiating audit fees, if an audit requirement arises in a future year.
Your independent auditor should be providing you with more than simply an audit report. Throughout the audit process, auditors gain insight into plan operations and your system of internal controls around the financial reporting process. Using this insight, plus extensive experience with other plans and continuing education, auditors should be able to draw your attention to areas for improvement, plus provide recommendations to address identified weaknesses. Obtaining expert advice on a timely basis may payoff immediately, reducing the possibility that a significant plan failure goes undetected and uncorrected.

Plan sponsors must weigh the cost versus the benefits of annual audits when an audit is not required by government regulations. Even if not required to have an audit in the current year, all plans, both large and small, must be auditable. Remember to design, implement, and maintain a strong system of internal controls; make sure your plan is operating in compliance with your plan documents and all rules and regulations; ensure plan trustees and plan management are fulfilling their fiduciary duties; and maintain the appropriate documentation for support. Do not wait for a regulatory notice or future audit to get things in order; it may be too late, and the results could be costly.