Don’t forget the upcoming 401(k) audit deadline

Summertime doesn’t just bring warmer weather – it also brings a critical 401(k) deadline. Every 401(k) plan subject to ERISA must file an annual Form 5500 with the DOL and IRS.

For calendar year plans that cover January through December, the submission is due by July 31 of the year following the plan year’s close. Plans that operate on a fiscal year must submit Form 5500 by the last day of the seventh month after the plan year ends. You may request a 2 ½ month extension, provided you file Form 5558 by the original due date. Missing these deadlines can result in penalties and compliance issues with both the IRS and the DOL.

In this article, we will discuss the basic filing requirements, highlight common problems plan sponsors face, and offer tips to ensure your audit is complete and accurate.

Choosing the right version of Form 5500

Every ERISA-governed plan has to file some version of Form 5500 each year, but the version you use depends on the size and structure of your plan:

• Form 5500 is the full version most large plans use. It applies when your plan has 100 or more eligible participants on the first day of the plan year or if you fail to meet the simplified filing criteria.
• Form 5500 SF is the short form for plans with fewer than 100 participants that satisfy several conditions. See the instructions for a full checklist, but some common disqualifiers include holding employer securities or failing the trust/insurance requirement.
• Form 5500 EZ is for one participant plans, such as a solo 401(k), covering an owner and possibly the owner’s spouse. Filing is optional if plan assets are less than $250,000 at the end of the plan year, but mandatory once assets exceed that threshold or upon plan termination, whichever comes first.

Changes in participant counts or other plan characteristics can cause a plan to transition from Form 5500-SF or Form 5500-EZ to the full Form 5500. If that occurs, you may be required to have a plan audit and attach the auditor’s report to your Form 5500 filing.

When is a 401(k) audit required?

The audit requirement hinges on participants with account balances. Plans with 100 or more participants with an account balance generally must engage an independent CPA to perform an annual audit. However, under the 80-120 participant rule, plans that previously filed as small may continue to file as small until they exceed 120 participants at the start of a plan year.

When an audit is necessary, the auditor’s opinion letter and financial statements must be attached to the Form 5500 filing. The auditor will examine the plan’s financials, internal controls, and adherence to the written plan document. Failure to attach a required audit exposes the plan to penalties from both the DOL and the IRS.

A clean opinion also provides confidence to participants that transactions are recorded properly.

Common audit deficiencies

Outdated or incomplete plan documents

Over time, the laws and regulations guiding retirement plans evolve. If your plan document lags behind these changes or is missing amendments, it could be out of compliance. Ensuring that all modifications are documented and clearly communicated to participants helps you avoid major compliance pitfalls.

Untimely contribution deposits

A sure way to run into issues is waiting too long to submit employee deferrals into the plan trust. Small plans have a 7-business-day safe harbor for depositing salary-deferral contributions, but large plans must deposit them as soon as administratively feasible. While the regulations provide an outside maximum limit of the 15th business day of the following month, this is not a safe harbor for large plans and is rarely considered compliant. If you can remit the funds sooner, you are expected to do so.

Incorrect definition of compensation

Perhaps the most frequent audit finding involves using the wrong definition of compensation for 401(k) calculations. Many sponsors accidentally exclude items like bonuses or shift differentials, or they incorrectly include certain types of pay. Even a small miscalculation can lead to mismatches in employee deferrals and employer contributions, followed by costly corrective contributions. Double-check what your plan document says and verify that your payroll system is configured to match that definition.

Failure to enroll eligible employees

Miscommunication, system errors, or misunderstanding of eligibility rules can leave qualified employees out of the 401(k) plan. Failure to enroll quickly becomes expensive: sponsors may have to make retrospective employer contributions, and in some cases, employee contributions plus lost earnings. Ensure that HR, payroll, and any outside advisors stay aligned on who is first eligible and when.

Best practices

If you’re required to have an audit report or think you may need one next year, it helps to prepare well in advance. Here are some best practices to keep everything on schedule:

Plan the timeline and assign roles

Build a backwards calendar anchored to your filing deadline (July 31 for most). Name one internal “audit captain” and give each stakeholder, such as payroll, custodians, and TPAs, explicit deliverables and due dates.

Gather essential documents

One of the best ways to keep the audit moving smoothly is to gather the necessary materials well in advance. Organize these documents to streamline the process:

• Governing documents – plan document, amendments, adoption agreement, and latest IRS determination or advisory letter.
• Governance – committee minutes on plan oversight, current ERISA fidelity bond, and service-provider agreements with fee schedules.
• Financials – year-end trust statements, detailed transaction listing, and nondiscrimination test results.
• Payroll – year-end payroll file showing gross compensation, deferrals, and match by participant.
• Participant files – samples of enrollment forms, loan notes, and distribution requests.

Maintain strong internal controls

Thoroughly document your policies and segregate duties for enrollment, deposits, and distributions.

Stay organized and communicate

Give your auditor read-only portal access to plan trust and payroll data. And make it a point to respond to questions or information requests within two business days to avoid last-minute bottlenecks.

Fix issues as soon as they surface

Nobody likes to discover issues in the middle of an audit, but addressing them head-on is the best approach. The IRS and DOL offer programs to correct plan defects. If your audit uncovers an issue, work with your auditor and take the necessary remedial actions as soon as possible.

Stay ahead of deadlines

Treat the 401(k) filing date as a routine checkpoint, not a dire drill. Confirm early whether an audit is required and keep your core documents up-to-date. A proactive timetable eliminates last-minute fixes, safeguards your plan’s tax-favored status, and reassures participants that their savings are in capable hands.