Everything You Need to Know about a 401k Audit

Everything You Need to Know about a 401k Audit

If your business includes a retirement plan with 100 or more participants, you can expect to work with a CPA (certified public accountant) who will perform an audit. Essentially, the government wants to be sure the retirement plans provided are managed correctly, carried out according to the plan’s documents, and fairly given to all participants.

The results of the audit will be included with Form 5500, filed with the Department of Labor, and then shared with the IRS and, in some cases, the Pension Benefit Guaranty Corporation.

To file the required information properly, and to avoid further audits, you need to know the steps to take, and what the process looks like as a whole. 

What is a 401k Audit?

A 401(k) audit is an examination of a company’s 401(k) retirement plan to ensure that it is in compliance with the requirements of the Employee Retirement Income Security Act (ERISA) and other applicable regulations. ERISA is a federal law in the United States that sets standards for employee benefit plans, including 401(k) plans, to protect the interests of plan participants and their beneficiaries.

What To Expect From the 401k Audit 

When preparing for a 401k audit, there are two possible types: a limited-scope audit and a full-scope audit. A limited-scope audit simply ensures all calculations and information is correct. A full-scope audit, however, takes a deeper look and conducts more testing overall. Both types focus on the following:

  • Contributions, from both employees and employer
  • Distributions
  • Participant eligibility testing
  • Investment income allocation to accounts of the participants

When conducting the audit, the auditor will select participants and perform tests. Primarily, they will be ensuring the participant is being allocated the correct amount and that deferral percentages are accurate. They do this by recalculating contributions.

The auditor will also be making sure contributions are made in a timely manner so that no employee loses out on what the plan documents ensured. All related tasks will be checked to make certain they were completed correctly, and that any issues have been resolved. If the auditor learns that plan documents are not being adhered to, that contributions are not made in a timely manner, that Form 5500 is not filed at the right time, or that any participants are missing, further IRS audits are likely.

The end result is an audited financial statement package that includes the auditor opinion letter, in which the CPA explains the completed work, and the financial statements. Most financial statements will look similar, and include:

  • employee and employer contributions
  • expenses
  • distributions

Those that include illiquid assets, though, will require more information in order to gauge a true valuation.

Key Components of a 401k Audit

Here are some key points to understand about 401(k) audits:

Mandatory for Certain Plans

401(k) audits are typically required for plans that have 100 or more eligible participants at the beginning of the plan year. Plans with fewer than 100 participants are generally exempt from the audit requirement.


The primary objective of a 401(k) audit is to verify the accuracy and completeness of the plan’s financial statements and to ensure that the plan’s operations and administration comply with ERISA regulations.

Qualified Auditor

The audit must be conducted by an independent and qualified certified public accountant (CPA) who specializes in employee benefit plan audits. This auditor is responsible for examining the plan’s financial records, transactions, and related operations.

Compliance Testing

The audit includes various compliance tests to ensure that the plan operates in accordance with ERISA guidelines. This can include testing of participant contributions, employer contributions, investment earnings, distributions, and other plan-related transactions.

Form 5500

As part of the audit process, the plan administrator is required to file an annual Form 5500 with the Department of Labor (DOL). The audit report, along with the Form 5500, provides transparency and accountability regarding the plan’s financial activities.

Participant Balances

The audit may also involve verifying that participant account balances match the contributions and earnings attributed to them, helping to prevent errors and discrepancies.

Employee Notices

The auditor will check that required notices, such as summary plan descriptions and summary annual reports, have been distributed to participants as mandated by ERISA.

Report and Recommendations

After completing the audit, the auditor issues a report that outlines any findings of non-compliance, errors, or deficiencies. Recommendations for corrective actions may also be provided.

How The Information Is Used

From the information received from both the audit and Form 5500, the Department of Labor is more able to monitor trends and patterns. They are able to see which plans seem to be consistently non-compliant with the regulations. In addition, it gives the Department of Labor a greater idea of the variety of plans offered in certain locations and in different sized companies, as well as among various industries.

Using a Business CPA is a Must

Because these audits must adhere to GAAP (Generally Accepted Accounting Principles) and the complexity of the process, a highly qualified CPA is essential. A 2015 assessment found that 39% of audited retirement plans had major deficiencies, or were altogether unacceptable. For that reason, it is imperative to work with an experienced and specialized CPA firm.

At Scharf Pera, our CPA firm in Charlotte with decades of experience, we have the knowledge and expertise to ensure your business meets all of the standards and requirements and to make this complex process stress-free.





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