5 Warning Signs Your Business Needs a 401k Audit

Employee Benefit Plan Audits: How One Employee Could Trigger a 401k Audit- And Other Warning Signs

If your business offers a 401(k) plan, you’ve already made an important investment in your employees’ futures. But are you also protecting your company’s future by staying in compliance with federal requirements?

Many businesses unknowingly cross the threshold that triggers a mandatory employee benefit plan (EBP) audit, and by the time they realize it, at best case they have to scramble to find an auditor on a deadline, or worst case they may already be facing late filing penalties, audit failure risks, or even Department of Labor (DOL) scrutiny.

This guide outlines five clear warning signs that your business might need a 401k audit, how to avoid or recognize them, and why working with CKH Group for your 401(k) audit requirements helps you stay ahead of regulatory requirements with ease and accuracy.

5 warning signs you need an Employee Benefit Plan audit (EBP audit/401k Audit):

• You have 100 or more participants in your 401(k) Plan
• You may be miscounting who qualifies as a ‘participant’
• You haven’t review plan operations or internal controls recently
• You’re Filing Form 5500 Without an Audit Attachment, or Have Already Experienced Penalties
• You’re Experiencing Turnover or Growth Fluctuations Around the 100-Employee Mark

What Is a 401k Audit, and Why Does It Matter?

A 401(k) audit, also called an Employee Benefit Plan (EBP) audit, is a detailed, independent examination of your company’s employee benefit plan, and most importantly, that the retirement plan is being managed in accordance with:

• ERISA (Employee Retirement Income Security Act)
• IRS requirements
• Department of Labor (DOL) regulations

The audit focuses on financial reporting, internal controls, plan operations, and participant data. It’s not just about finding mistakes; it’s about confirming that you, as the plan sponsor, are fulfilling your fiduciary duties and that your employees’ retirement funds are being managed properly.

All businesses that offer a 401(k) plan are required to file Form 5500, an annual report that provides the IRS and DOL with information about the plan’s financial condition, operations, and compliance status. Generally, if your plan qualifies as a “large plan” (100+ participants) at the beginning of the plan year, your Form 5500 must be accompanied by a full audit report conducted by an independent qualified public accountant.

5 Warning Signs You Might Need a 401(k) Audit and other 401(k) Audit Requirements

1. You Have 100 or More Participants in Your 401(k) Plan

The 100-participant rule is the key trigger for whether your business is required to undergo a 401(k) audit. It’s why just one employee taking you from 99 participants to 100 can be a huge deal. But it’s also one of the most misunderstood thresholds.

Here’s what you need to know:

It’s not about how many employees your company has, or even how many are eligible.

It’s only about how many participants in your 401(k) plan have a balance as of the first day of the plan year. You might have 300 employees company-wide, but if only 90 are participants in your U.S. 401(k) plan, an audit may not be required (yet).

Participants include:

• Current eligible employees who have a balance in the plan
• Terminated employees who still have a balance in the plan

So, even if you only have 80 employees actively contributing to the plan, your total participant count could be over 100 if you have 20 former employees with vested balances still in the plan.

Note that this is a change that went into effect January 1, 2023. Originally, participants included anyone eligible, but now it only considers the number of participants with account balances, as of the beginning of the plan year, when determining whether it is a large or small plan for Form 5500 purposes. This means that if you have a large number of eligible employees, but not all are contributing, you may not necessarily require an audit.

Part-time employees may count toward the 100-participant threshold. While not all part-time employees count, long-term, part-time employees who have met the eligibility requirements outlined in your plan document (e.g., hours worked, tenure, etc.) and have a balance are included in the count.

Remote or out-of-state employees also count, even if they work in a different state or country- so long as their location doesn’t make them ineligible. The participant count is tied to plan eligibility + balance, not work location. If they are employed by your U.S. entity, are eligible for or enrolled in your U.S.-based 401(k) plan, and have a balance, they count. Be sure to consult with local labor laws, your plan provider, and your accountant on whether certain employees have eligibility.

Why 100? The Department of Labor uses the 100-participant mark to distinguish between “small” and “large” plans under ERISA. Large plans are considered more complex and therefore require independent oversight through a formal audit.

2. You May Be Miscounting Who Qualifies as a “Participant”

Even when businesses understand the 100-participant rule, miscounting participants is a top reason companies unintentionally miss audit requirements.

Here’s where it gets tricky:

You must include:

• Employees eligible to participate and
• Former employees who still have a vested account balance in the plan
• Rehired employees who had a prior balance or are again eligible

Even with the new changes as of 2023, you can still run into common miscounting mistakes by overlooking terminated employees with balances, or general administrative miscounting errors. This can happen when you have incomplete or outdated payroll and HR records, lack of coordination between HR and plan administrators, or have changes in plan eligibility rules that aren’t reflected in reporting systems.

3. You Haven’t Reviewed Plan Operations or Internal Controls Recently

Even if your third-party administrator (TPA) handles day-to-day plan logistics, your company is ultimately responsible as the plan sponsor.

Common compliance missteps include:

• Late employee contributions (outside of DOL deadlines)
• Loan policy violations (e.g., exceeding limits or missed repayments)
• Errors in eligibility tracking or vesting
• Misclassified employees (especially common with seasonal or contract workers)
• Failure to follow plan documents

If your internal controls haven’t been tested, your audit will likely uncover issues that could result in costly corrections or disclosures. That’s why a 401(k) audit is crucial as a risk management tool that uncovers gaps before the DOL or IRS does.

4. You’re Filing Form 5500 Without an Audit Attachment, or Have Already Experienced Penalties

Form 5500 is the required annual return for benefit plans. Once you meet the “large plan” threshold, your Form 5500 must be accompanied by a full audit report conducted by an independent qualified public accountant.

Don’t assume your TPA handles everything. As the plan sponsor, it’s your job to ensure your Form 5500 is filed accurately and completely, including the required audit if applicable. If you’ve passed the 100-participant threshold but continue to submit Form 5500 without the required audit, you could face:

• Penalties of up to $2,400 per day for late or incomplete filings
• Increased audit scrutiny from the DOL
• Delays in plan corrections or terminations
• Legal exposure due to fiduciary noncompliance

Bottom Line – you must be proactive with receiving a 401k audit in order to include the audit report in your filing.

5. You’re Experiencing Turnover or Growth Fluctuations Around the 100-Employee Mark

If your business has been hovering around 100 participants for the past few years, sometimes under and sometimes over, it is important to understand the 80-120 rule. The “80-120 participant rule” allows plans that fluctuate around the 100-participant mark to delay the start of audit requirements under very specific criteria:

• If a plan had between 80 and 120 participants at the start of the plan year, and
• It filed as a “small plan” (no audit required) the previous year,
• Then it can continue to file as a small plan for the current year even if it now has over 100 participants.

So, for example, if last year you had 99 participants, and this year you have 100, you can still file as a ‘small plan’ to avoid having to get an audit.

This is often used by growing businesses that are crossing thresholds slowly or experiencing seasonal workforce changes. Just keep in mind that this is not a permanent exemption. If your plan exceeds 120 participants at the beginning of the plan year, you are no longer eligible to claim this exception. You must file as a large plan and attach a 401(k) audit to your Form 5500. And then keep in mind that even if it falls back down below 120 but above 100, you will still have to file it as a large plan, because this exception is only available if the previous year was filed as a small plan.

Use the 80-120 rule as a buffer, not a long-term strategy. If you’re approaching or exceeding 100 eligible participants consistently, now is the time to prepare for an audit.

Why Choose CKH Group for Your 401(k) Audit?

Once you hit the audit threshold, the DOL requires that the audit be conducted by a licensed, independent qualified public accountant. Not all firms are equally equipped to handle this, especially if you want more than just a “check-the-box” audit. And, as we’ve seen with the 2023 change, it’s possible that requirements and definitions for ‘large plan’ can depend on legislative changes, which is why it is so important to have reliable, trusted accounting advisors like CKH Group to keep you in the know.

CKH Group is an Atlanta-headquartered CPA firm offering powerful assurance, tax, accounting, and advisory services to individuals, small businesses, global enterprises, and government entities. Our specialized Employee Benefit Plan audit team helps businesses across industries navigate complex ERISA rules and maintain full regulatory compliance.

With CKH Group, you’ll benefit from our deep expertise in 401(k) and EBP audits. We provide you a streamlined process with quick turnaround that reduces disruption and peace of mind knowing your audit is done right the first time, by a business that treats yours like it’s our own. You can also visit our 401k Audit Services page to learn more.

Don’t Wait Until You’re Noncompliant

401(k) audit requirements can sneak up on fast-growing businesses, especially if you’re focused on expansion and hiring. If you’ve seen any of the warning signs above, or if your workforce is generally approaching the 100-participant threshold, it’s time to take action.

If you have any additional questions, reach out and let’s chat. You can contact us online, or you can call us at 1-770-495-9077 or email us at [email protected].

The above article only intends to provide general financial information and is based on open-source facts, it is not designed to provide specific advice or recommendations for any individual. It does not give personalized tax, financial, or other business and professional advice. Before taking any form of action, you should consult a financial professional who understands your particular situation. CKH Group will not be held liable for any harm/errors/claims arising from the articles. Whilst every effort has been taken to ensure the accuracy of the contents, we will not be held accountable for any changes that are beyond our control.