Is your 401(k) ready for an IRS audit?

By: Victor H. Hicks II, CFP®, AIF®
Owner, Managing Principal
Lumin Financial, LLC

An Independent Registered Investment Adviser


As a plan sponsor or trustee, complying with ERISA regulations is likely at the top of your list of 401(k) plan administration concerns.  Not surprisingly, the IRS is similarly concerned about whether plans are in compliance with the Internal Revenue Code.  During the annual review process, plans should proceed with caution when determining if an independent audit is required.  A misstep in this area can be very costly.

The annual Form 5500 filing for a qualified retirement plan generally must include audited financial statements for the plan. However, the U.S. Department of Labor (DOL) exempts small retirement plans from the general audit requirement under certain conditions.

Definition of a Small Plan:  Plans with fewer than 100 participants at the beginning of the plan year are eligible for the audit waiver if they meet specific requirements. In addition, a plan that has between 80 and 120 covered participants at the beginning of the plan year that filed a small plan annual report for the previous year may elect to continue to file as a small plan.

Covered participants generally include active plan participants and beneficiaries; employees who were eligible to participate in the plan as of the beginning of the plan year, even if they don’t contribute to the plan; and terminated participants who have plan account balances.

Other Waiver Requirements:  In addition, a plan has to meet three other basic requirements to be eligible for the audit waiver:

  • As of the last day of the preceding plan year, at least      95% of the plan’s assets must be “qualifying plan assets.” If less than      95% are qualifying plan assets, any person who handles nonqualifying      assets must be bonded in an amount at least equal to their value.
  • The plan must include certain information in the      Summary Annual Report (SAR) furnished to participants and beneficiaries in      addition to the usual required information.
  • The plan administrator must furnish, without charge,      copies of statements the plan receives from financial institutions holding      or issuing the plan’s qualifying plan assets to any participant or      beneficiary who requests the information. In addition, the administrator      must provide participants evidence of any required fidelity bond, upon      request.

During the annual review, we suggest that plan sponsors exercise due care when determining whether an independent audit is required.  If you are unsure whether your plan requires an audit, or you’re if you would like assistance finding a qualified 401(k) plan auditor, please call a Lumin Financial adviser.


Lumin Financial is a fee-only independent Registered Investment Adviser, specializing in 401(k) plans for small- to mid-sized employers. Lumin Financial advisors serve plan sponsors throughout the Midwest with a disciplined approach to managing plan investments, counseling on fiduciary risk matters, and reducing excessive plan fees. In addition to managing investments and risk, Lumin delivers personalized financial education to plan participants. Let them help you plan a clear direction for a bright future.

Lumin Financial, LLC is a Registered Investment Adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.  Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors we are not qualified to render advice on tax or legal matters.  You should discuss any tax or legal matters with the appropriate professional.