Understanding Benefit Plan Audit Requirements for Employers

Employee benefit plans, such as 401(k), 403(b), and employee stock ownership plans (ESOPs), are valuable tools for attracting and retaining employees. They also come with compliance responsibilities that employers need to stay on top of throughout the year.

One area that can catch businesses off guard is the employee benefit plan audit requirement. Many employers know they need to file IRS Form 5500 (Annual Return/Report of Employee Benefit Plan), but they may not realize when an audit must be attached to that filing.

Understanding the thresholds now helps you plan ahead, avoid surprises, and keep your benefit plan in good standing.

What is an Employee Benefit Plan (Form 5500) Audit?

An employee benefit plan audit is different from a traditional financial statement audit. Rather than looking at the company’s financial statements, the audit focuses on the plan itself.

During the audit, the auditor reviews plan activity and tests participant-related details. This can include whether:

• Employees were eligible to participate
• They elected to participate
• The correct amounts were withheld from paychecks
• Contributions and distributions were handled properly

The audit also includes a review of the plan’s investments. In many cases, the auditor receives a certified trust statement from the plan’s trustee or custodian.

The certified investment information is then included in the plan financial statements, which show plan assets, contributions, distributions, and investment activity for the year.

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When is a Benefit Plan Audit Required?

The main threshold employers should know is the 100-participant rule. In general, benefit plans with 100 or more participants at the beginning of the plan year are considered large plans and typically need an audit attached to Form 5500.

However, the participant count is not limited to current employees who are actively contributing. Terminated employees with remaining account balances in the plan generally count toward the threshold.

For example, if an employee left the company but did not roll over or withdraw their funds until a later year, that person may still be counted as a plan participant because they still have a balance in the plan.

This is why it’s helpful for employers to review not only active employees, but also inactive participants with balances. Over time, terminated employees who remain in the plan can push participant counts higher than expected.

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Small Plan vs. Large Plan Filing

A small plan generally does not need an audit and files a more simplified version of Form 5500. A large plan has more reporting requirements, including additional schedules and attachments. In most cases, that also means an audit must be completed and attached to the filing.

The 80-120 Participant Rule

The 80–120 participant rule provides some flexibility for plans that hover around the 100-participant threshold.

If your plan has between 80 and 120 participants at the beginning of the plan year, you may be able to file Form 5500 the same way you filed in the prior year. For example, if your plan has historically filed as a small plan and your participant count increases slightly above 100, you may be able to continue filing as a small plan for that year.

On the other hand, if your plan has been filing as a large plan and the count dips slightly below 100, you may choose to keep filing as a large plan.

This rule helps reduce back-and-forth changes in filing status when participant counts fluctuate from year to year.

Common Scenarios That Can Trigger Questions

For most plans, the audit requirement comes down to the participant count at the beginning of the plan year.

New plans can have unique considerations because they may not have any participants at the very start of the first plan year. Employers launching a new plan should discuss the filing and audit requirements with their third-party administrator and accounting advisor.

A plan under the audit threshold could also choose to have an audit or another type of review performed if the fiduciary committee wants outside procedures performed over certain areas. In that case, the work may not be a full audit, but it can be structured around specific concerns.

How to Prepare for a Benefit Plan Audit

A good first step is to connect with your third-party administrator, often referred to as a TPA. Verify whether the TPA or trustee can provide a certified trust statement. If that certification is not available, the audit may require more in-depth procedures, which can increase time and cost.

Employers should also maintain complete census, payroll, and employee records. If it’s the plan’s first audit, the auditor may need to test beginning balances and review prior-year investment statements and certifications. HR records are also important, including hire dates, eligibility dates, termination dates, and support for benefit payments.

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Best Practices for Staying Compliant

Review the plan’s definition of compensation and compare it to your payroll codes. Misalignment can create issues, especially with bonuses, special pay codes, or other types of compensation that may or may not be included under the plan document.

Employers should also understand eligibility rules and track when employees become eligible to participate. HR and payroll teams should coordinate with the TPA to confirm employees are enrolled timely and that deferrals are handled correctly.

A strong relationship with your TPA, organized records, and regular reviews of participant counts can go a long way toward making the audit process smoother. For employers approaching the 100-participant threshold, early planning can help you know what to expect and avoid last-minute surprises.