If you are an employer that offers a 401(k) plan to your employees, then once your plan reaches a certain size, it will need to be audited on a periodic basis. If the word audit makes you cringe, don't worry, because this type of audit is just a routine part of sponsoring a qualified plan. A 401(k) audit is conducted by a third-party administrator (TPA) and must be done whenever a given plan meets certain criteria as outlined in ERISA (The Employee Retirement Income Security Act). The audit is conducted in order to ascertain whether the plan is being run correctly and whether it is financially sound. Audits are performed by a qualified public accountant who will examine your 401(k) plan documents and records in order to ensure that you are compliant with all IRS and ERISA guidelines. He or she will also determine whether the information that you are submitting to the IRS every year on Form 5500 is accurate and correct. ERISA mandates that any plan that has at least 100 eligible participants at the beginning of the plan year (usually January 1st) must be audited. It is key to remember that not all employees may be eligible to participate in a 401(k) plan. For example, part-time employees are often ineligible to participate, as are independent contractors and other types of workers who are not full-time W2 employees. But eligible employees do not have to actually participate in the plan in order to be counted. And Cook Martin Poulson's website lists the the following three types of plan participants who are not current employees that the IRS says must also be counted: Eligible employees are counted if they fall into one of the above categories as of the end of the prior tax year. Finally, if your company falls within the 80-120 rule, then you don't need to be audited until the number of eligible employees exceeds 120 for the year. If your company employs fewer than 100 eligible participants in a given year and then exceeds 100 participants the next year (but less than 120), then you don't need to be audited. This can continue until you have at least 120 eligible employees. But as long as you have less than 120 eligible employees, then you can continue to file as a "small" plan indefinitely. First, you'll need to know what auditors generally examine when they audit a qualified plan. According to Inovapayroll.com, the list includes the following: Next, you'll need to get all of your documents in order and ready to be scrutinized. The auditor will ask you for your plan documents, payroll data, and time-stamped communications. Having these ready at hand can save you a lot of time and frustration. It is also a good idea to integrate your payroll and record-keeping systems so as to minimize potential errors. Finally, you need to be sure to enlist the help of a reputable plan administrator to oversee your plan when you first establish it so that you can be warned of potential trouble areas before the audit begins. A good administrator should also be able to provide you with plan documents, financials, payroll data, valuations, and other information as requested by the auditor. The cost of an audit can be borne by the plan. You are not required to pay for the audit, although you can if you want to. HealthEquity.com reports in its blog that "For small to medium size businesses (plans under $50 million in assets), we see average annual audit costs of $8,000 - $12,000. We have even seen auditors that charge over $18,000 for a plan audit." The actual cost of an audit can vary depending upon several different factors, but the real question is who has to foot the annual bill.ERISA Criteria
How Can I Prepare for an Audit?
How Much Does an Audit Cost?
401(k) Plan Audit Cost FAQs
Where does the term 401(k) come from?
401(k) refers to the section in the IRS Tax Code that authorizes the creation of a retirement plan offered by an employer and intended to help employees save for retirement.
What does a 401(k) Plan Audit Cost?
The cost of an audit can be borne by the plan. The actual cost of an audit varies depending upon several different factors, but the real question is who has to foot the annual bill.
What is the difference between a Roth 401(k) and traditional 401(k)?
With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.
Are there other retirement savings plans other than a 401(k) plan?
Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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