A 401(k) audit is primarily triggered when a plan becomes a "large plan," generally defined as having 100 or more eligible participants with account balances on the first day of the plan year. Other triggers include late contributions, compliance test failures, or inconsistencies in Form 5500 filings.
A 401(k) plan audit is a review of your company's qualified plan by a third-party accounting firm to ensure the plan meets guidelines and regulations set by the IRS and the Department of Labor (DOL). Put simply, audits help ensure an employer is operating its plan correctly.
If your plan was filed as a large plan last year, you must continue filing as a large plan (and undergo an audit) unless your eligible participant count drops below 100. Misapplying this rule is one of the top red flags that can prompt DOL scrutiny.
THE “80-120” PARTICIPANT RULE
Generally, any 401(k) plan that has over 100 eligible participants is considered to be a large plan and will be required to have an annual audit performed by independent auditor.
As part of annual reporting and Form 5500 filing, 401(k) plans and other qualified retirement plans with a certain number of participants with a balance in the plan must have an annual audit.
Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.
An important step in avoiding DOL audits is properly filing Form 5500. Employers can file Form 5500 through vendor-approved software, and they must complete the form by a certain deadline every year. At Human Interest, we can file Form 5500 on your behalf with our Complete and Concierge service tiers.
Every firm has a process for proposals. Understanding audit pricing is crucial for plan sponsors to budget appropriately and avoid unexpected expenses. Generally, single employer 401(k) plan audit fees range from $8,000 to $13,000, and most firms offer flat rate fees.
Even if your company is usually exempt from an audit, you must get your accounts audited if shareholders who own at least 10% of the shares ask you to.
Top IRS audit triggers
You can receive penalties from both the IRS and the Department of Labor for a late ERISA audit. The IRS typically charges $25 per day until the day you file with a maximum penalty of $15,000. The DOL's fees vary depending on the size of the 401(k) plan, but they can go up to $1,100 per day with no set maximum.
Fewer 401(k) Plans Will Require A 5500 Audit Starting in 2023. 401(K) plans with over 100 eligible plan participants are considered “large plans” in the eyes of DOL and require an audit to be completed each year with the filing of their 5500. These audits can be costly, often ranging from $8,000 - $30,000 per year.
This does not mean you'll end up in jail. Not all IRS audits will result in a penalty. If you're able to justify the items being reviewed on your return, the IRS will conclude the audit without imposing any charges or penalties.
Mean accounting date arrangements
390 enables a company to draw up its accounts to any date within seven days either side of its accounting reference date. HMRC will generally allow a company to adopt its year-end date for corporation tax purposes provided it does not vary more than four days from a mean date.
A taxpayer must get a tax audit done if their business's sales, turnover, or gross receipts are over ₹1 crore, or if their profession's earnings exceed ₹50 lakh in a financial year. There are other situations where a tax audit might also be required.
Let's explore the IRS audit triggers to keep you in the clear.
The 401(k) "Rule of 55" allows penalty-free (but still taxable) withdrawals from your current employer's 401(k) if you leave your job in the year you turn age 55 (or 50 for certain public safety workers), bypassing the usual 10% early withdrawal penalty for distributions before 59½, but it does not apply to IRAs or rollovers, so don't roll over funds if you plan to use this exception, say Fidelity Investments and this article from Charles Schwab. You must separate from service in the qualifying year, and the distribution must come directly from that specific employer plan, not an IRA.
It's good to be specific, but there's a danger in words such as “everything,” “nothing,” “never,” or “always.” “You always” and “you never” can be fighting words that can distract readers into looking for exceptions to the rule rather than examining the real issue.