When Do You Need an Outside Audit?

March 17, 2020

While the term “audit” can strike fear into the hearts of even the most seasoned business professionals, the audit process for your company’s 401(k) plan doesn’t have to be an intimidating one.

Any company-sponsored retirement plan with 100 or more participants (as of the first day of the plan year) is required to use an independent accountant to audit its annual financial statements. Learn more about these audit requirements and how Cassell Plan Audits can help you solve plan problems—not just identify them.

What Defines a Plan “Participant”?

Often, the biggest question facing a plan sponsor is whether their plan participation exceeds the 100-employee threshold, mandating an audit. Many may mistakenly assume that this standard means that there must be 100 employees actively contributing to the plan at the beginning of the plan year.

Instead, “plan participant” includes:

  • Anyone currently eligible for the plan, even those who are not actively contributing or have never contributed; and
  • Any former employees who haven’t rolled over their existing plan balance.

This means that companies with fewer than 100 current employees shouldn’t assume that they don’t need an audit. The best way to assess the number of plan participants is to download a static list (census) from your plan on the first day of your plan year and assess who on the list meets one of the above requirements.

How Can Plan Sponsors Streamline Their Plan Participation Rates?

If you’re a plan sponsor who would like to delay the annual audit requirement, there are a few simple steps you can take to bring down the number of plan participants.

The first is to review your plan’s eligibility requirements and compare the number of active plan participants to those who are eligible. If your true participation rate is relatively low and you’re already taking steps to educate employees on how they can contribute, it may be a good idea to extend the waiting period so that it takes employees longer to become eligible.

This can be especially helpful for businesses with high employee turnover rates; not only can it reduce the number of new employees unnecessarily increasing participation rates, but it also reduces the chance of having a short-term employee move onto another job while keeping their small 401(k) balances in your plan.

Plan sponsors can also require mandatory cash-outs for former employees who have a vested balance of under $5,000. Short-term dips in the stock market can provide a good opportunity to evaluate which, if any, plan participants have become newly eligible for these mandatory-cash outs.

What Else Should Plan Sponsors Know About Independent Audits?

If your plan has consistently been below the 100-participant threshold in the past, you may be able to keep this small-plan status until you have at least 120 plan participants on the first day of the plan year. This means that companies that are on the cusp of 100 participants can benefit from culling their participant rate to avoid the outside audit requirement, even if the number creeps over 100 for a few years in a row.

For plan sponsors who do need the services of an outside auditor, look no further than Cassell Plan Audits. These audits are all we do, which provides us with the systems and efficiencies to minimize disruption to your daily schedule. Audits don’t need to be unpleasant—and we can work efficiently to solve any problems we uncover.

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