401(k) Audit Requirements: What Employers Need to Know

As we move through the year, the audit requirements for 401(k) plans in the United States continue to evolve — especially after regulatory changes that took effect in recent years. If you’re an employer or plan administrator, understanding whether your 401(k) plan needs an audit (and what that involves) is essential to staying compliant and avoiding penalties.

Who Needs a 401(k) Audit?

Traditionally, if a 401(k) plan had 100 or more eligible participants at the beginning of the plan year, it was considered a “large plan” and required an annual independent audit as part of the Form 5500 filing.

Key Change: Only Participants With Account Balances Count

Under the new rule, only employees with an account balance in the 401(k) plan are counted toward the 100-participant threshold.

 That means:

  • If someone is eligible for the plan but hasn’t enrolled or contributed, they are not counted.
  • This change has helped many plans avoid unnecessary audits simply because they had a high number of eligible-but-inactive employees.

The 80/120 Rule Still Applies

The 80/120 Rule offers more flexibility:

If your plan had fewer than 100 participants with account balances in the previous year, you can continue to file as a “small plan” until you reach 120 participants.

So even if your participant count grows above 100 but stays under 120, you can delay the audit requirement.

 

What Does the Audit Involve?

If your plan does require an audit, here’s what that means:

  • You must hire an independent, licensed CPA experienced in 401k plan audit services.
  • The auditor reviews plan operations, internal controls, contributions, distributions, and compliance with IRS and DOL regulations.
  • The audit report is submitted with Form 5500, which is due by July 31 for calendar-year plans. (You can file for an extension to October 15.)

Why It Matters

Failing to submit a required audit can lead to:

  • Heavy penalties from the Department of Labor (DOL) and IRS
  • Delays in processing your Form 5500
  • Risk of plan disqualification

 

Final Thoughts

401(k) audit rules are more nuanced than ever. Thanks to the revised participant-count criteria and the 80/120 rule, many small to mid-sized plans can now avoid audits — but only if they’re aware of the details.