A new DOL policy means you may not need an audit (here’s what you need to know)

June 15, 2023

Small businesses rejoice as a new Department of Labor rule means many may no longer be required to perform an annual 401(k) audit and submit their results on Form 5500 to stay compliant.

Until recently, an annual audit was required if 100 or more of your company’s employees were eligible to participate in your 401(k) plan. (It’s a little more complicated than that; there are additional items that factor in, but this is a good general guideline.) 

In effect, this also counted eligible employees who had no intention to join your plan.

On February 23, the Department of Labor, IRS, and Pension Benefit Guarantee Corporation unveiled major changes to Form 5500 and Form 5500-SF, used to report on employee benefits plans.

Starting in the calendar year 2023, plan sponsors only need to consider participants with account balances when they tally participants at the start of their plan year for the purpose of determining whether their plan needs an audit or not. That relieves thousands of businesses from audit requirements—reducing their paperwork and administrative costs, as well as for the DOL, IRS, and PBGC.

But there’s a catch.


You might still want a review of your 401(k) procedures

It’s no surprise companies, even with experienced plan administrators, are celebrating the end of their annual audit requirement. But don’t break out the party hats yet. Some things to know:

Even if you currently have less than 100 employees, you may not be off the hook.

Former employees are usually eager to move their money, and companies often want them to do so, preferring not to maintain fiduciary responsibility for people who no longer work for them. 

But if your 401(k) plan remains popular with company alumni, your number of current employees is irrelevant. What matters is your total count of participants in your 401(k) plan, including those who no longer work for you but still have a balance in the plan. If former employees bring your total count to 100 actively participating in your plan… you will still need an audit.

Once you cross around 100 people in your plan, get ready for next year.

Bearing in mind that additional factors besides number of participants, the audit requirement is based on how many participants your plan has on the first day of each benefit year. You should know in advance if you’re likely to cross the threshold. If your company is growing, you may need a 401(k) audit next year.

Even if you’re exempt, you may still want a qualified firm to review your procedures.

Businesses newly exempt from 401(k) audits should consider having an outside expert check their processes anyway. Similar to an audit, without the official Form 5500 paperwork, this review is called “agreed-upon procedures.” 

Why? Small businesses are the most likely to have errors—and the least likely to have systems to catch them. The smaller the business, the less likely there’s a dedicated plan administrator. Most of the time the person responsible also wears many other hats, in accounting, payroll, or human resources. Tasked with many competing responsibilities, it’s easy to overlook issues—and often difficult to recover from them if an IRS 401(k) audit uncovers them.


On the fence about a 401(k) audit?

If you’re thinking, “It’s not required, but I’d still like someone to look,” we can help. Contact Cassell Plan Audits today to learn more about our 401(k) audit and agreed-upon procedures services.

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