What Plan Sponsors Should Know Before Their First 401(k) Audit

Jun 30, 2026

When people hear the word audit, they often go straight to the nightmare scenarios, like never-ending paperwork, disruption, and government scrutiny. An audit can feel like a form of punishment, even if you’ve done nothing wrong besides a simple error. But for many retirement plan sponsors, preparing for an audit is a regular part of the job.

Although audits are fairly common in the world of retirement planning, they can still be nerve-wracking, especially for plan sponsors who have yet to go through one. In fact, your first audit tends to be a time when administrative duties shift from being a background operational task to a front-burner priority.

In reality, the prospect of an audit is actually quite manageable if you’re organized. Plan sponsors who pay close attention to compliance rules will have considerably less to worry about. With the right preparation, a first-time audit can be a smooth process that strengthens plan oversight and helps identify opportunities for improvement.

When Do I Need a 401(k) Audit?

In general, a company-sponsored retirement plan is required to undergo an independent audit once it reaches 100 or more active participants. Audits of retirement plans are supposed to verify that the plan is being administered according to its governing documents and regulations by the IRS and Department of Labor. However, the rules around auditing are not always as straightforward as a simple head count.

First, consider the rules around eligible participation. For auditing purposes, the Department of Labor counts the following people as plan participants:

Current employees who are actively contributing to the plan
Current employees who are no longer making contributions but still maintain an account balance
Former employees with vested account balances remaining in the plan
Beneficiaries of deceased participants who have an account balance or are receiving distributions

Plans that are close to the audit threshold should carefully review their participant count. Small variations in the calculation can determine whether an audit is necessary or not, along with the time and energy that goes into one.

One important exception to the standard threshold is the Department of Labor’s “80–120 rule.” Under this rule, plans that filed as a small plan (less than 100 employees) in the previous year can remain exempt from auditing, but only if they have no more than 120 participants at the beginning of the current plan year. Once the participant count reaches 121, the exemption fades and they must hire an accredited, independent accountant to complete an audit.

What To Expect

For sponsors who have yet to undergo an audit, one of the biggest questions is what the audit process actually looks like. A 401(k) audit differs from a standard financial audit in that it’s more narrow in scope, focused strictly on compliance. While every engagement is different, most 401(k) audits follow a similar sequence:

Hire: The plan sponsor is responsible for the audit getting completed on time, not the auditor. So, it’s important to choose an experienced firm — and preferably, one that participates in the AICPA’s Employee Benefit Plan Audit Quality Center, a highly-respected voluntary training for auditors.
Meet: An auditor won’t knock on your door without notice. You’ll set up an initial meeting with them, discuss the information they need, and share contacts.
Gather: Over the next few days or weeks, the plan sponsor will assemble the requested information for the independent auditors, such as demographic information on participants, account summaries of participants, internal control questionnaires, and other governance documents.
Follow-Up: Sponsors should expect questions and requests for additional documentation. This is a normal part of the process and does not necessarily indicate a problem. Prompt responses and organized records can help keep the audit moving efficiently.
Review: From there, the audits will review plan documents, financial records, participant data, and supporting reports to determine compliance. This process can take weeks or months, depending on the experience of the auditor and the complexity of the plan.
Report: Once an auditor’s testing and review are finished, they issue an independent report that will be submitted along with your 5500 Form.
Resolution: Following the audit, plan sponsors must resolve issues and close any compliance gaps identified by the auditor, who should recommend corrective actions in their report.

How To Prepare

The biggest challenge for many first-time audits is timing. Gathering plan documents, payroll records, participant data, trust statements, and compliance testing results can take longer than expected. Here’s how to stay organized:

Track Deadlines: You should start the process several months before the Form 5500 deadline. Unless you file for an extension, it’s due on the last day of the seventh month after the end of your plan year (e.g., a plan ending December 31 must submit the 5500 by July 31). Qualifying extensions are available until October 15.
Have Key Documents Ready: Maintaining organized records throughout the year can significantly reduce the burden of an audit. Create a centralized system for all the records that might be requested by an auditor, including: financial information, participant activity records, payroll data, IRC compliance testing reports, and loan and distribution information.
Compliance By Design: As a company grows, employers can unintentionally produce compliance issues by not revisiting the design and structure of a plan. Rules that might have once made sense — such as restricting eligibility to certain employees or requiring workers to actively opt in — can be identified as problems that need fixing by auditors. Plan sponsors can easily anticipate these issues by conducting annual reviews, especially as they approach the 100-participant threshold.

Audits might sound stressful for plan sponsors. But they don’t have to be. By understanding the requirements, organizing documentation early, and working with a clear plan, sponsors can navigate the process confidently.

How IMA Can Help

The most effective retirement plans are also well governed and prepared to undergo an audit. IMA Retirement can help you design a plan that’s not only compliant but also aligned with your business goals, supportive of employees, and adaptable as your organization evolves.

Our goal is always to remove layers of complexity and to create a framework that makes retirement plans more attractive and sustainable over time.

For assistance with your retirement needs, contact an IMA Retirement advisor at retirement@imacorp.com or 877.305.1864.