There is often stress associated with 401k audits for employers. A general connotation associated with audits is that they can be scary and time-consuming because of how complex they can be. Most employers try to avoid audits, but that is not the best way to grow a business. The truth is that 401k audits and audits in general are a normal part of doing business and therefore, not as scary as they sound.

What is the “80-120” rule and does it apply to my company?

There are some businesses that do not need an external audit of their 401ks or retirement plans. Generally, benefit plan audits are required when the number of participants exceeds 100. Having 100 employees is generally the difference between a “small” and a “large” business. There is, however, one exception to this general rule. This rule is called the “80-120” rule, which allows your employee count to fluctuate between 80-120 employees without having to change your corporation's status from “small” to “large” every year.

The point of this rule is to help businesses avoid switching back and forth between a “small” and “large” business. Here are some examples to help demonstrate how this rule is beneficial to companies:

  • If your company had 115 employees last year and filed as a “large” company, but now only has 90 employees, the 80-120 rule allows your business to file as a “large” company again. It’s implied that your company only had less than 100 employees temporarily. 
  • If your company had 86 employees last year, but now has 110, then the rule allows your company to file as a “small” business again. 

The point of the rule isn’t to help businesses avoid audits, or to find a loophole for filing as a “small” or “large” business. It’s to help businesses avoid the complications associated with switching from a “small” to a “large” business. For example:

  • If your company had 115 employees last year, and you filed as a “large” business, you would not be able to file as a “small” business in the coming year even though you have less than 120 employees.

Your company does not have to undergo a 401k audit if it filed a "small" plan status in the prior tax year. Organizations of all sizes can benefit from this rule since they can avoid the audit requirement and focus on growing their businesses instead.

The 80-120 Rule Filing Guide

The 80-120 rule is intended to provide some relief for plans that fluctuate between slightly more or less than 100 participants, preventing them from switching between small and large plans every year. It allows plans with 80 to 120 participants at the beginning of the current plan year to choose the same category (for example, "large" plan or "small") as the previous year. Here is a table that can help you categorize your plan.


What form do I need for a 401K Audit?

When conducting a 401k audit, you would use Form 5500 to file. IRS Form 5500 and financial statements are due seven months after your 401k plan year-end. This due date can be postponed by two and a half months if you apply for an extension.  Before filing the form, you must first determine the exact number of participants to determine which schedules should be filed with Form 5500. 

How to determine the number of Participants for 401k Audit

The number of participants plays an important role in determining which schedules should be filed with Form 5500. 

Active Participants are individuals who are currently employed and are earning or retaining credited service under the plan. Making sure you don't forget any employee enrolled in a 401k is crucial. Retired or Separated Participants Receiving Benefits former employees participating in the employee welfare benefit plan and receiving group health continuation coverage are covered by former employees.

An insurance company is not included if it has made a binding commitment to pay all benefits. Beneficiaries of Deceased Participants there are two exceptions to this category: nonvested former employees who have had a break in service, or former employees who have received a deemed distribution or cash out of their entire nonforfeitable accrued benefit.

Preparing For a 401k Audit

It may be time for your 401k plan's first audit, so review it and ensure all documentation is in order. Even though first-time audits may seem daunting, with the right help, there's nothing to worry about! With the help of an experienced plan auditor, you will be able to understand each step of your audit, keep your paperwork organized, and stay within your deadline. Your auditor will examine only the assets and activities of your plan, so the process will feel similar. Here are some tips for preparing for your first 401(k) audit:

Comply with the DOL and IRS rules and your plan document.

Read your plan document again to familiarize yourself with its provisions. Ensure that you are familiar with the laws of the DOL (U.S. Department of Labor) and the IRS as well. So that your auditor can issue a clean opinion, and ensure you comply with reporting requirements and timeliness of distributions if you have not already.

Organize your documents and have them ready for your auditor or CPA.

Documents will need to be provided to the plan audit. Similar to a financial statement audit, bank statements, payroll reports, distribution information, plan documents and amendments, current year eligibility listings, and discriminatory tests and results are reviewed.

Communicate efficiently with your auditor or CPA.

During any audit, communication is key to success. Therefore, communicate openly and frequently to understand what will be needed, when, and how to communicate questions, issues, and concerns. It will be better for the audit process in the long run if you have more information.

Need help with your 401k audit?

Finding the right auditor has never been easier. In just 5 minutes, we'll get to know you, your business, and the kind of help you're looking for.


Find an Accountant