For many small business owners, administering a 401(k) plan is viewed as a valuable employee benefit rather than a compliance obligation. However, as a company’s workforce grows, so do its responsibilities under Department of Labor regulations.
One requirement that frequently catches employers by surprise is the annual employee benefit plan financial statement audit.
Many plan sponsors assume a plan financial statement audit is required only for very large companies. In reality, the requirement is generally based on participant counts, and businesses can unknowingly cross the threshold that triggers an audit obligation.
Understanding the Participant Threshold
Retirement plans are generally classified as either “small” or “large” for annual reporting purposes. Once a plan reaches certain participant-count thresholds, it may be required to include audited plan financial statements with its annual Form 5500 filing.
Historically, the determining factor was the number of eligible participants at the beginning of the plan year. As a result, some employers were surprised to learn that employees who were eligible to participate but chose not to enroll could still be included in the count.
In recent years, changes to the regulations have modified how participant counts are determined for 401(k) plans, focusing on participants with an account balance at the beginning of the plan year.
Why Small Companies Often Miss the Requirement
There are several reasons smaller organizations fail to recognize when their plan may require an audit:
Why Compliance Matters
Failing to obtain a required plan financial statement audit can lead to significant consequences. The Department of Labor may reject an incomplete Form 5500 filing, potentially exposing the plan sponsor to penalties and additional scrutiny. In some cases, correcting late or deficient filings can become more costly than conducting the audit in the first place.
Beyond regulatory compliance, a plan financial statement audit can also provide value to the organization. Independent auditors review key areas such as participant data, contributions, distributions, and internal controls surrounding plan operations.
This process can help identify administrative errors before they become larger compliance issues and uncover internal-control gaps that could result in future problems.
Planning Ahead Can Reduce Costs and Stress
The most successful plan sponsors monitor participant counts proactively rather than waiting until year-end. If your organization is growing, consider discussing participant trends with your third-party administrator, recordkeeper, and employee benefit plan auditor well before filing season.
Early Planning Offers Several Advantages
- Avoids last-minute surprises regarding audit requirements.
- Allows sufficient time to select an independent auditor.
- Helps management budget for audit-related costs.
- Provides an opportunity to address operational and compliance issues before the audit begins.
Organizations approaching the threshold should also ensure that participant records, payroll data, and plan documentation are complete, accurate, and readily accessible. Good preparation can significantly streamline the audit process, reduce disruptions for internal staff, and help minimize audit costs.
The Bottom Line
Many small businesses are unaware that their 401(k) plan may eventually become subject to an annual plan financial statement audit requirement. As participant counts increase, plan sponsors should regularly evaluate whether their reporting obligations have changed.
Understanding the rules before a threshold is crossed can help avoid compliance issues, unexpected costs, and filing delays. A proactive review today can save considerable time and effort later.
If your plan is growing, now is a good time to speak with your retirement plan advisors and determine whether a plan financial statement audit may be on the horizon.
Prepare Before the Filing Deadline
As your organization grows, retirement plan compliance can become increasingly complex. SingerLewak’s Employee Benefit Plan Audit professionals work with businesses of all sizes to help navigate evolving regulatory requirements, identify potential compliance risks, and streamline the audit process.
Whether you are approaching an audit threshold for the first time or looking to strengthen your plan-administration practices, our experienced team can provide the guidance and support needed to help you meet your obligations with confidence.
Contact UsDisclaimer: This article is intended for general informational purposes only and should not be relied upon as legal, tax, accounting, or employee benefit plan compliance advice. Regulatory requirements governing retirement plans, including Form 5500 reporting and audit obligations, can be complex and fact specific. Readers should consult with their professional advisors regarding their organization’s particular circumstances before taking any action based on the information discussed herein.