The Employee Retirement Income Security Act of 1974 (ERISA) requires 401k plans with 100 or more eligible participants to file an audit with its Form 5500. For plans with less than 100 or more eligible participants, an annual audit is not required.

Limited Scope vs. Full-Scope 401k Plan Audits

In the past, two types of 401k plan audits existed: limited and full-scope audits. In a limited scope audit, an independent auditor does not have to audit any plan asset information if a bank, an insurance company, or a regulated trust company holds the 401k plan’s assets. If one of these financial entities certifies the plan assets, then the employer could pursue a limited scope audit.

Note that the law prohibits broker or investment companies from certifying plan investments for a limited scope audit.

As a result of this limited scope, independent auditors must provide a “disclaimer of opinion” to indicate that because of the significance of the financial information not audited, they are unable to express a professional opinion on the plan’s financial statements.

On the other hand, a full-scope audit requires the independent auditor to test year-end asset balances and any investment income. After this additional analysis, the independent auditor will issue a written opinion on the 401k plan’s compliance with the laws under both the Internal Revenue Code (IRC) and ERISA. No disclaimer here is necessary since the auditor performed an in-depth financial analysis.

Limited Scope Audits Are Now ERISA Section 103(a)(3)(C) Audits

Limited scope audits are changing, and plan sponsors should understand how these changes impact their 401k plans.

As the title of this blog suggests, limited scope audits are history, being replaced by ERISA Section 103(a)(3)(C) audits1. This newly named audit does not change any of ERISA’s laws or applicability. However, it does affect how 401k plans are audited, effective as of on December 15, 2021.

If any employers are filing their Form 5500 and audit during October 2022, for the 2021 plan year, 401k plan auditors must use a full-scope audit or the ERISA Section 103(a)(3)(C) audit.

Under this new 401k audit, the independent auditor will express an opinion on the 401k’s financial statements, even though auditors can exclude the same financial information they would in a limited plan audit. Employer Impact

Employers with audited 401k plans should know the following:

  • Auditors cannot engage in an ERISA Section 103(a)(3)(C) audit unless the employer acknowledges – in writing — its responsibility for maintaining current plan documents and administering the 401k plan.
  • The employer mut provide the auditor with a substantially completed Form 5500 before the auditor begins auditing the 401k plan.
  • The employer must acknowledge in writing that a bank, an insurance company, or a regulated trust company holds the plan’s assets, allowing the assets to be certified.

Because of this additional responsibility, employers with auditable 401k plans must spend more time preparing for their plan’s annual audit, making sure they get the right documentation to the auditor earlier than in years past.

Additional Resources

  1. AICPA. New Auditing Standard for Employee Benefit Plans. (2019) https://us.aicpa.org/content/dam/aicpa/interestareas/frc/auditattest/downloadabledocuments/attest-clarity/ebp-auditing-standard-at-a-glance.pdf
  2. Id.
  3. AICPA. ERISA Section 103(a)(3)(C) Audits Resource Center. (2021) https://www.aicpa.org/resources/download/erisa-section-103-a-3-c-audits
  4. Kiesewetter, Jenny. Sequoia. 401(k) Plan Form 5500 Filing Deadline Approaches. https://www.sequoia.com/2022/07/401k-plan-form-5500-filing-deadline-approaches/

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2022 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Jenny Kiesewetter — Jenny is a Retirement Plan Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline retirement plan compliance. In her free time, Jenny enjoys spending time with her friends and family, traveling, live music, and dining out.