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When a Retirement Plan Audit is Required

Thursday, August 13, 2020

When a Retirement Plan Audit is Required


When you hear the word ‘audit’, do the hairs on the back of your neck stand up?  Do you get an aching feeling in the pit of your stomach?  No worries…not all audits are a bad thing.

Annual 401k Audit Requirements

To protect the best interests of plan participants as well as you as a plan sponsor, federal law requires that the annual audit on large 401k plans be performed by an independent, external accounting firm. The purpose of this audit is to confirm that the plan is operating in compliance with the written plan documents and federal regulations set forth by the IRS and Department of Labor.  It also ensures that all plan financial information is being reported accurately.  

120 is the Magic Number 

If you’re unsure of whether or not your plan is required to undergo an external 401k audit, there’s one number to keep in mind: 120. Why? Because companies that have previously filed their 401k plan Form 5500 as a “small” plan and haven’t requested an independent 401k plan audit are required to do so once they have more than 120 “eligible participants” in the plan.

The 80-120 Rule 

This rule provides an exception for growing businesses. If you (a) have between 80 and 120 participants, and, (b) were considered a small plan in the previous year, you can continue to file the shortened version of the form. When you report at least 121 participants, you must file as a large plan. If you file as a large plan after employing the 80-120 exception, you must continue to file as a large plan – even if your participant count drops below 120 – as long as you have at least 100 participants in your plan. Generally, these numbers (120 for first-time annual audits, 100 for subsequent audits) apply to the number of eligible participants on the first day of the plan year.

Employees vs. “Eligible Participants”

Notice the careful wording in these 401k rules: external 401k audit requirements don’t only apply to companies with 120 or more employees or even 120 or more employees who are participating in the 401k plan. This applies to any plan with 120 or more “eligible participants” - a group that includes former employees who have a balance in their account, current employees who are eligible for the plan, but not participating in it, and others. 

Kris Feldmeyer
The Retirement Specialists at First Merchants Private Wealth Advisors are here to help
N. Jane Smith
Kris Feldmeyer
Sue Holbrook
Eva Kreps


Investment Management solutions provided by First Merchants Private Wealth Advisors may not be FDIC insured, are not deposits of First Merchants Bank, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency.  This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.