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Year-End Planning – Is an Audit of Your 401(k) Required?


The determination of whether an audit of your 401(k) plan is required is based the classification of the plan as either a “Small Plan” or a “Large Plan.”  The general rule is that plans with 100 or more eligible participants at the beginning of the year (January 1st) are considered “Large Plans” and are required by ERISA to have an audit performed by an independent third party.

Eligible participants include employees who participate in the plan, employees who have achieved the eligibility requirements to participate in the plan but have elected not to participate and retired or terminated employees with money still in the plan.  If you are approaching the requirement for needing an audit, you can review the number of retired or terminated employees with money still in the plan and encourage them to take a distribution or roll the balance into another plan.  Some 401(k) plans contain provisions allowing the plan to distribute funds automatically to separated participants with small balances, generally of $5,000 or less.  Any actions to reduce the number of eligible participants in the plan must be completed before January 1st.

There is an exception to the 100 eligible participant threshold established by the department of labor that is known as the 80-120 Participant Rule.  This rule allows plans with 80 to 120 participants at the beginning of the year to elect to file the Form 5500 using the same category (“Large Plan” or “Small Plan”) that was used in the previous year.

Now is the best time to prepare for the upcoming plan year.  By managing the number of eligible participants in the plan, you may be able to avoid an audit.  Consult with your plan administrator and your accounting advisor to help determine whether your plan will need an annual audit.


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