Hitting the First Year Audit Requirement: What You Need to Know

Hearing that your retirement plan needs an audit can feel overwhelming and may leave you asking questions: Why do we need an audit? Will this be an annual requirement? How do we choose the right auditor?

Let’s break it down.

When is a Retirement Plan Audit Required? Understanding the 80-120 Rule

The key factor is the participant count and whether your plan is classified as a small or large plan.

Effective January 1, 2023, only participants with an account balance on the first day of the plan year are included in participant counts. The 80-120 rule provides flexibility for plans near the audit threshold. Here’s how it works:

• Plans with 80-120 participants can generally file the Form 5500 based on the prior year’s status.
• Small plans may file a short form 5500 and are not required to include audited financial statements with their filing.
• Once a plan exceeds 120 participants with account balances on the first day of the plan year, it is considered a large plan and must file a full Form 5500 with financial statement audited by an independent CPA firm.

This applies to 401(k) plans, 403(b) plans, defined benefit plans, employee stock ownership plans (ESOPs), pooled employer plans, and others.

Special note for new plans: The first-year threshold is based on the last day of the initial plan year. If the count of participants with balances is 100 or more, the plan may be required to have an audit beginning at the plan’s inception. Once the plan has been determined to be a large plan, the participant count will need to drop below 100 in order to file as a small plan without an audit requirement.

Participant Count (First day of plan year)	If Filed as Small Plan in Prior Year	If Filed as Large Plan in Prior Year
< 80	Must file as small (no audit)	Must file as small (no audit)
80-99	Must file as small (no audit)	May file as small (no audit) or large (audit)
100-120	May file as small (no audit) or large (audit)	Must file as large (audit required)
> 120	Must file as large (audit required)	Must file as large (audit required)

Choosing the Right Auditor

While nearly any independent CPA could step up to perform your audit, not all possess the experience and expertise to do so. The Department of Labor (DOL), the government agency that requires the audits, shares the following in a publication available on its website:

“One of the most common reasons for a deficient audit report is the auditor’s failure to test areas unique to employee benefit plan audits due to lack of experience with such audits.”

The DOL has been cracking down on CPA firms that dabble in benefit plan audits. According to the November 2023 DOL Audit Quality Study, the deficiency rate among auditors who only audit a couple plans is 70%. That rate drops dramatically in firms that audit significantly more plans.

When selecting a CPA firm to perform your audit, here are some things to consider:

• Firms with membership with the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC), which is focused on promoting high-quality audits, require firms to establish specific policies and procedures and maintain current knowledge of relevant professional standard and regulations.
• Not all retirement plans are the same. For example, an ESOP is very different from a 401(k). Ask about the composition of the CPA firm’s practice to ensure they have the experience to meet the specific needs of your plan. Take a look at this article about finding the right audit firm for your ESOP.
• Some firms offshore their retirement plan audit practice. Consider whether you would prefer to work with a firm that keeps 100% of their audits in the U.S.
• Consider firms that specialize in this field and have a devoted, experienced ERISA audit team. Ask how many plans the firm audits and who will be doing the work.

If you have questions about the audit requirement for your plan or if you think you might need an audit, please contact a member of the retirement plan audit team here at Jones & Roth. We’re here to help you navigate the process with confidence.