Newburg | CPA Tax Brief (9/29/21)

As your company grows, you may be on the cusp of a required retirement plan audit.  The Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of retirement plans by an independent qualified public accounting firm subject to the provisions of ERISA. The purpose of this Q&A is to provide those companies that may be headed for their first-year retirement plan audit, some insight on what to expect and the nuances associated.

What is considered a “large plan” for purposes of the IRS and Department of Labor (DOL) audit requirements?

Generally, those plans with 100 or more eligible participants are required to have an annual independent audit of their plan.

Exception: 80/120 Rule – Allows some plans with between 80 and 120 eligible participants at the beginning of the current plan year to elect to complete the current return using the same category (i.e., file as a small plan with no audit requirement) that was used in the previous year.

How is this audit submitted annually and what is the deadline?

The audited financials are required to be submitted as an attachment to the Form 5500 filing. Note that the Form 5500 filing is typically due within seven months from the end of your plan year. There is an option to extend your filing due date to nine and a half months from the end of your plan year.

Are there other exceptions or nuances with initial year filing requirements?

It should be noted that plans that have between 80 and 120 eligible participants at the commencement of the plan year are permitted to file their Form 5500 similar to the prior year. This is known as the “80-120 Participant Rule”. By way of example, a plan that has 75 participants on January 1, 2020 that grew to let’s say 118 participants by January 2021, may elect to file a small plan again to avoid an audit for the 2021 plan year. Note that an audit would not be required until the eligible participants exceeded 120 as of the first day of the plan year.

How are the number of eligible active employees counted?

It is important to note that the number of eligible active employees are counted regardless of whether or not they have elected to participate or have an account opened. Those former employees that continue to maintain their plan with you are also included in the participant count. As a result, you could only have 50 active participants but have 121 eligible participants in a plan year. 

What are some of the more common issues that may come up during our first-year audit?

Some of the more common issues pertain to late remittances of participant deferrals, incorrect deductions, incorrect application of the definition of “Compensation”, and incorrect administration of hardship distributions. The independent auditor will look to help the plan’s sponsor in understanding how to improve retirement plan controls and avoid making future mistakes.

What are some of the key documents and information required by the independent auditor?

Prior to commencing the audit fieldwork, it is commonplace for the auditor to review with the plan sponsor key documentation that will assist with the audit. Third-party administrators can also help facilitate this information for the plan sponsor:

  • Last three years of Form 5500 filings and draft of current year Form 5500
  • Latest plan documents and amendments
  • Summary plan description and any modifications
  • Agreements with service providers and their SOC-1 reports
  • IRS opinion letter on the plan document, if applicable
  • Census information on employees (includes key demographic information)
  • Trust and recordkeeping reports
  • Trust certification
  • Reconciliation of trust report to Company W-3
  • Compliance testing results
  • Contribution listing by pay period of remittances
  • Oddities occurring in previous years
  • Listing of any non-traditional investments held by the retirement plan/401(k)
  • Fidelity bond support – insurance coverage supports and coverages
  • Listing of any distributions, loans in force or other plan activity

For further information regarding 401k/Employee Benefit Plan Audits, please feel free to contact our team at Newburg | CPAs.  Visit