If you sponsor a company retirement plan or 401K, chances are you’ve heard about the Department of Labor’s (DOL) audit requirements — and maybe even know the 100-participant threshold rule.
But what you might not know is how easy it is to trigger a retirement plan audit unintentionally — even when you’re trying to do everything right.
From miscounts on your Form 5500 to plan features that raise red flags, even small oversights can put your retirement plan in the DOL’s crosshairs. The good news? With some proactive planning and an understanding of what regulators look for, you can dramatically reduce your 401K audit risk.
Let’s walk through five of the most common Department of Labor audit triggers — and how to avoid them.
1. Delinquent Participant Contributions
If a plan fails to remit participant contributions and loan repayments within the timeframe prescribed by the DOL, these transactions are considered to be prohibited transactions and are required to be reported in a supplemental schedule to the audited financial statements and disclosed on the Form 5500 filing. These delinquent contributions can indicate there is a potential oversight issue with the plan and provide clear evidence that there was a plan deficiency which could lead to further questions about the plan operations.
Plan sponsors can avoid these transactions by reconciling contributions from payroll to the plan on a pay-by-pay period basis, keeping an eye on any off-cycle payrolls and addressing any variances prior to the processing of each payroll.
2. Forgetting the 80-120 Rule
Many sponsors are aware of the 100-participant threshold, but not everyone understands the flexibility provided by the “80-120 rule.”
This rule allows plans with between 80 and 120 participants with account balances to file in the same category (small or large) as they did the previous year. It’s designed to avoid flip-flopping back and forth between DOL 401K audit requirements due to small year-to-year changes in headcount.
Where sponsors often go wrong is ignoring how they filed the prior year or assuming they can skip an audit just because they’re under 120. If your plan was filed as a large plan last year, you must continue filing as a large plan (and undergo an audit) unless your eligible participant count drops below 100. Misapplying this rule is one of the top red flags that can prompt DOL scrutiny.
3. Failing to Distribute Small Balances
Terminated employees who still have a balance in the retirement plan — even a small one — count toward your participant total.
If you’re not regularly cashing out participants with smaller balances (where permitted by the plan document), these accounts can accumulate over time and push your plan over the audit threshold.
Many plan sponsors overlook this area, but regularly processing mandatory distributions for former employees can significantly lower the number of participant account balances and potentially eliminate the need for a retirement plan audit altogether.
4. Missing Deadlines or Filing Errors
Filing your Form 5500 late or submitting incomplete or inconsistent data can trigger an audit, regardless of your participant count. The DOL uses automated systems to scan for errors, and mismatches between your participant count and prior year filings — or basic mistakes in plan type or financial data — can make your plan stand out in the wrong way.
To stay off the DOL’s radar, review your Form 5500 carefully, ensure all fields are completed accurately, and submit on time. Engaging with an experienced auditor or third-party administrator (TPA) can go a long way in helping you get it right.
5. Overlooking Plan Features That Trigger Additional Scrutiny
Certain plan features — such as holding employer securities, offering ESOP components, or operating across multiple controlled groups — increase the complexity of your retirement plan and can draw additional attention and subject you to Department of Labor penalties.
For example, if your 401(k) includes employer stock as an investment option, you may be subject to stricter reporting under ERISA. Similarly, if your plan includes automatic enrollment or safe harbor provisions, these features have specific operational requirements that the DOL may verify.
The more complex your plan, the more important it is to work with advisors who specialize in 401K retirement plan compliance and can ensure each aspect of your plan meets regulatory standards.
Stay Ahead of the DOL with Smart Planning
Avoiding a 401K DOL audit starts with being proactive. If your plan is approaching the 100-participant threshold — or if you’ve experienced recent growth, turnover, or structural changes — now is the time to evaluate your audit risk and avoid costly penalties.
Start by:
- Reviewing the number of current participant account balances
- Determining whether the 80-120 rule applies to your plan this year
- Reviewing small balances and applying your plan’s cash-out provisions
- Coordinating with your recordkeeper and audit firm well before year-end
Want to avoid getting flagged by the DOL? Our employee benefit plan audit specialists can help you assess your 401K plan, review your Form 5500, and implement best practices to avoid compliance issues.
Whether you're close to the audit threshold or already subject to one, we’ll help you navigate the process confidently with our Audit & Accounting Services.
Contact us today to set up a consultation and stay ahead of your retirement plan obligations.