The answer to this question depends on whether your 401(k) plan is considered to be a “large plan” (with 100 or more participants as of the beginning of the plan year) or a “small plan” (with fewer than 100 participants at the beginning of the plan year). The Employee Retirement Income Security Act of 1974 (ERISA) requires large plans to have an annual audit of the plan’s financial statements performed by an independent qualified public accountant. Small plans are exempt from this requirement.
However, to provide relief for plans where the number of participants may fluctuate above and below this 100-participant threshold, the special rule provided by DOL Regulation 2520.103-1(d) allows plans with between 80 and 120 participants as of the beginning of the current plan year to elect to be treated in the same manner in which it was treated in the prior year.
For example, if a plan with 104 participants as of the beginning of the current plan year was treated as a small plan in the prior year, the plan may elect to continue in the current year as a small plan, and would continue to be exempt from the audit requirement. The plan may continue to make such an election until it exceeds 120 participants. At which point, the plan would be a large plan, and an audit of the plan’s financial statements would be required.
Similarly, if a plan with 98 participants as of the beginning of the current plan year was treated as a large plan in the prior year, the plan could elect to continue being treated as a large plan and continue with having an audit of its financial statements. A plan in such a situation may elect to not be treated as a small plan if the plan believes the decline in the number of participants to be temporary. If the number of participants of a plan previously treated as a large plan falls below 80, the plan would be a small plan, and an audit would no longer be required.
If you have questions about whether your 401(k) plan requires an audit or if you are in need of an audit for your 401(k) plan, contact us.
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