Background

We are a growing business in Los Angeles with 90 employees, most of whom are 401k-eligible. Previously I worked for a firm that had 150 employees and the 401k had to be audited annually by an independent CPA. I’m aware that plan audit can add complexities so we want to stay on top of things.

Question

Are we required to file as a large filer and hire an independent CPA firm to perform ongoing annual audit?

 Answer

Nesa 401k/ 403b Experts commends you on being top of this important retirement plan rule! Federal statute requires that a 401k or 403b plan require an annual audit when the plan’s total eligible participant count reaches 100. There are three types of eligible participants:

• Actively participating employees.
• Former employees – retired, deceased, or separated – who still have accounts in the plan.
• All eligible employees who have yet to enroll or have elected not to enter the plan (yes, they are counted, too).

The number of participants dictates whether you have a small or a large plan; therefore, an accurate total eligible participant count is critical. Put simply, when the plan reaches 100 total participants count, the plan is required to (1) hire an independent qualified CPA to conduct an independent audit of the retirement plan, and (2) file the expanded IRS Form 5500 return/report along with all the applicable schedules, such as Schedule H, which is a longer version of the plan’s financial information. The financial statements/ audit report and Form 5500 must be e-filed annually with the DOL.

Wait, I thought there is an exception to the threshold of 100 eligible participants?

Glad you ask. Yes, the “80-120 Participant Rule” allows a retirement plan that is currently filing the Form 5500 as a “small filer” to continue to file as a small filer. In other words, a plan can (and many do) take advantage of this rule and not file as a large filer (remember, becoming a large plan filer means annual CPA audit) until total participant count exceeds 120. This can potentially give you years of “cushion” until you file as a large filer, thus saving you thousands in fees.

Advance planning is important

401k and 403b plans are required to satisfy numerous government rules and regulations. It can be a challenge to ensure your plan is complying with these ever-changing statutes. It is critical to hire a compliance firm that provides you support and helps determine when your plan will require an annual audit.

Not sure if your retirement plan needs an audit?  Contact us for a second opinion, or an independent review of your situation.