Thursday, April 11, 2024

What Is A 401k Audit

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401k Audit Process

There are some cases where an employer may have 100 or more eligible participants in their 401k plan, but they are not obligated to get an audit.

This exception allows plans with 80 to 120 participants to forego an audit if the plan fits the category of a small plan in the prior tax year. This exception can allow plans with more than 100 eligible participants to continue to file as a small plan indefinitely, provided that the number of plan participants does not rise above 120 participants.

So, for example, if your plan had 75 eligible participants in 2017, 105 participants at the beginning of the 2018 tax year, and 118 at the beginning of the 2019 tax year, you could continue to file as a small plan for 2019.

When Does A 401 Or Other Retirement Plan Require An Annual Audit

The Employee Retirement Income Security Act of 1974 requires annual audits of plan financial statements by an independent qualified public accountant of plans subject to the provisions of ERISA. This requirement is applicable to plans with 100 or more eligible participants at the beginning of the plan year. Plans meeting this criteria would be considered to be a large plan.

Plans that are subject to ERISA are required to report certain information annually to federal government agencies, including the Department of Labor , the Internal Revenue Service and the Pension Benefit Guaranty Corporation .

For many plans, the information is reported to the DOL on Form 5500, Annual Return/Report of Employee Benefit Plan, that includes financial statements prepared in accordance with accounting principles generally accepted in the United States and certain supplemental schedules.

When Do You Need A 401k Audit

If a company that provides a 401k has more than 100 eligible employees, it is likely they have been through an audit or another assurance service. The audit for a 401k plan is similar to that of an audit of a company. There will be an agreement for the services provided, a list of items the auditor will request, testing of documents and other evidence, and a report on the financial statements. The best way to have an efficient and effective audit is to understand, gather, and provide those requests back to the auditor.

From the companys perspective, the requests can be divided into different areas based on where you might pull the information. There will be a custodian involved, which is where you will pull financial data there will be a third-party administrator , which is where you will pull some compliance information often a payroll provider, which is where you will pull payroll information and finally, your human resources department will need to provide some plan documents and employee files.

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Additional Work Required During An Initial Audit

When you have your first retirement plan audit there will be additional audit procedures required. In order to perform the audit your auditor will have to perform certain procedures related to the Plans beginning balances for the year under audit. Each audit is different, but in some cases this could mean that several prior years may need to be tested to ensure the beginning balances are correct. If these procedures are not performed to your auditors satisfaction they may not be able to issue an audit opinion that is acceptable to the Department of Labor.

Getting An Extension For Your 401 Audit

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Thankfully, if the Form 5500/audit deadline is approaching and you know you cant make it, you can request a 2½ month extension – bringing your final Form 5500 and 401 audit due date to October 15th , or 9½ months after the end of the plan year.

Unfortunately, because the 401 plan audit and the Form 5500 are submitted together, the penalties for failing to submit your 401 plan audit by that 7-month deadline can become painfully expensive very quickly.

IRS fees/penalties: $25/day, maximum of $15,000 for late filing.

DoL fees/penalties: up to $1,100/day, no mandated maximum for late filing.

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What Companies Are Required To Conduct A 401 Audit

A company is required to conduct a 401 audit if its plan has a certain number of eligible participants at the beginning of the plan year. Generally speaking, a company only needs to conduct an audit if they have 100 or more eligible participants in the plan . However, there is an exception that helps growing businesses. If your total number of participants fluctuates between 80 and 120, you can hold off on an audit until you begin a plan year with 121 or more participants. This is known as the 80-120 participants rule. While your plan will be considered a large plan at the 100-participant threshold, you could have one or more years to go before youre required to complete an audit under this rule.Once your plan is considered a large plan and you’ve crossed the 120 eligible participants threshold, you’ll need to conduct audits in the future. You’ll continue to file your Form 5500 as a large plan unless the eligible participant level dips below 100, in which case itll be considered a small plan.

What Is A 401 Audit

A 401 plan audit is a review of your company’s qualified plan by a third-party accounting firm to ensure the plan meets guidelines and regulations set by the IRS and the Department of Labor . Put simply, audits help ensure an employer is operating its plan correctly. They review the information provided on a plans Form 5500 and financial statements to verify accuracy.

Upon completion of a 401 plan audit, the employer and those involved in managing the plan may receive certain communications from the auditorincluding an audit communication letter and a management recommendation letter. The employer can use these communications to both address areas of noncompliance and improve processes before future audits.

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The Complete Guide To A Fast Pain

If youre responsible for your companys 401 administration, you probably know that the annual 401 audit is not a fun process.

In fact, wed go as far as to say that it sucks .

We dont need to tell you how tough this can be to tackle – especially if this is your first time doing it. And as nice as it is to commiserate, thats not super helpful. So, in the interest of being super helpful, weve provided you with everything you need to know to get through your 401 audit as quickly and easily as possible.

In this guide, well cover:

The 401 plan audit can be a huge pain. Heres how to face this 401 administration challenge head-on:

Check Out The Records

Preparing for your first 401k audit

You would also need to dig records to produce to the auditing officers when needed.

It is noteworthy that you only need to dig the records for the specified year. Unless the auditing officers ask for more information.

In addition to finding out the complete records, it would be an added advantage if you can go through the records yourself. Seek help from your accountant to understand whats in the record and why it is there.

The audit officers, as already mentioned, can ask for personal interviews with you and your employees. And if you already knew about your records, you can easily answer the questions they throw at you.

To sum it up, a 401 audit is not something that you should fear. All you need to do is choose the right plan and pay the taxes at the right time. And you can rest assured that you wont end up paying penalties to the IRS.

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Department Of Labor And 401k

The Department of Labor is charged with making sure employees are being treated fairly, and in the case of 401 plans, there is an act they designed to govern those plans called the Employee Retirement Income Security Act, or ERISA for short. ERISA gives guidance on how plans are supposed to perform and provides protection for individuals in the plans.

How Much Do 401 Audits Cost Employers

The cost of audits depends on different factors, including business size and audit type. According to some sources, annual audit costs range from $8,000 to $12,000 for small- to medium-sized businesses although some audit fees have been as high as $18,000.

Limited scope audits require less review, so theyre often more affordable than full-scope audits.

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Contributions Rollovers And Forfeitures

Documents in this area are prepared and provided by the plan administrator and third-party administrator and custodian.

Contribution information is provided to facilitate comparison of participant contributions to amounts per payroll forms and payroll summary reports. Employer contributions are also recalculated to determine whether they appear to have been calculated in accordance with the provisions in the plan documents.

Information is also prepared and provided by the plan administrator so the audit team can assess whether participant contributions were remitted to the plan timely. This is a common area for an audit finding, particularly in initial audits, as many companies are not familiar with the requirements for timely remittance of participant contributions.

For large plans that are subject to audits there is not a safe harbor rule , but rather once a pattern has been established for the ability to segregate participant amounts from the employers general assets, and remit them to the plan, that pattern must be applied consistently to avoid delinquent remittance.

If instances of delinquent remittance are noted during the audit they are identified in the financial statements and a supplementary schedule as well as on the Form 5500 for the plan. It is also recommended that a correction be calculated and remitted for earnings lost by participants due to the delinquent remittance.

Has The 401 Auditor Worked On Similar Plans


Technically, any qualified independent accountant can do your 401 audit. But of course, not all 401 auditors are created equal. Youll want to ask: how many 401 audits do they do each year? Are 401 audits a side project for them, or are they a main focus of the firm? An experienced 401 auditor will likely have detailed processes in place to ensure that everything is done correctly, which greatly reduces the risk that something slips through the cracks.

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When Is A 401k Audit Required In California

Understand when a 401k audit is required in California with Cook CPA Group. Our Roseville tax accountants discuss employee benefit plans audit regulations and when you have to perform a 401k audit in California.

Handling the 401 administration for several workers can be a heavy burden, especially when it is time to conduct a 401 audit. However, it is important that this process is done carefully and correctly to avoid an unwanted external audit. Companies that possess a well-organized 401 auditing system are more likely to attract valuable employees to their business. If your business needs assistance performing a 401 audit, you should consult with an experienced Roseville and Sacramento 401 auditor today. At Cook CPA Group, our business accountants would be proud to help you conduct a 401 audit for your business. Our firm is here to explain when a 401 audit is required in California.

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Common 401k Audit Questions

What is ERISA?

The Employee Retirement Income Security Act of 1974 is a federal law that establishes guidelines for the administration of retirement plans for privately held companies. These requirements include providing plan participants with essential information about the plan features, funding and investment structure. ERISA also defines how long a person may be required to work before becoming eligible to accumulate benefits and plan funding rules, requires accountability of plan fiduciaries, provides participants the right to sue for benefits and breach of duty, and guarantees participants certain benefits if the plan is terminated. There are several 401k plan resources available on the Employee Benefits Security Administration site which further explore central themes covered in ERISA.

Are 401s Subject to ERISA?

Yes. Any pension plans offered by non-governmental organizations, including both defined benefit and defined contribution plans , are regulated by ERISA. In addition, welfare benefit plans, Health Reimbursement Accounts and Flexible Spending Plans are also subject to ERISA.

What is Form 5500?

When is a 401 Audit Required?

What is the Purpose of a 401 Audit?

What is a Limited Scope Audit?

What is a Full Scope Audit?

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Planning And Audit Requests

Like most audits, your auditor will likely start with a planning call or in person meeting to create an audit timeline similar to the one shown above. Once the timing and approach of the audit have been determined, your auditor will communicate an expectation on timing of deliverables. This is generally where new audit clients will require the most assistance and guidance as 401 audits are very administratively demanding. Preparing your HR or benefits departments to fulfill audit requests is crucial to a smooth and efficient audit. See the listing of commonly requested audit items below. Although this isnt a complete listing, it will help greatly to understand the wide range of requests youll see during your audit.

Having the auditors requests prepared for the beginning of fieldwork is the first step toward a successful 401 audit.

When Must A 401k Plan Be Audited

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401 audits can be stressful for employers. Even hearing the word audit can be enough to induce panic. The truth is that 401 audits are a normal part of doing business and therefore, not as scary as they sound.

According to IRS rules, a 401 plan must be audited if it meets certain requirements as laid out by the Employee Retirement Income Security Act . There are three questions to ask to determine if your company plan requires an audit.

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What Are The Benefits Of An Ebp Audit

The audit of the financial statements of an employee benefit plan is meant to safeguard the financial integrity of the plan to provide health, retirement and other associated benefits of the plan to participants over the term of payments.

An EBP audit may also provide benefits to a company in streamlining and making the operations of the plan more efficient by identifying the strengths of the internal controls involved in financial reporting.

Companies also benefit from identifying areas of weakness or operational errors and with assistance in carrying out the legal requirements of Form 5500.

What Is An Employee Benefit Plan Audit

An audit of an employee benefit plan involves the examination of financial statements provided by a third party to the DOL, plan management and plan participants. The primary focus of an EBP audit is to accurately gauge the ability of the plan to cover current and future benefits and payments.

In general, the sponsors human resources and financial accounting departments, an actuary, a third-party administrator, Employee Retirement Security Act of 1974 legal counsel, investment trustees and administrators, as well as an independent auditor, may all play a significant role in this process, as applicable.

An EBP audit can be a complex undertaking. The plans financial reporting and the audit environment both provide unique factors in an EBP audit and can make this process much more complex than a standard audit.

These unique factors may include:

  • Regulations of the Internal Revenue Service and Department of Labor
  • Federal and state laws
  • Special reporting and audit requirements
  • Nature of the plan operations

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Audit Process: How The Large Plan Audit Works

Now that weve covered the important basics, lets run through the audit process. We know that sounds like a ton, and, well… it is. So weve taken the liberty of boiling down the auditor-related minutiae.

This is the audit process as it matters to you.

Weve broken the Large Plan Audit down into 3 steps .

We’ll go over each step below:

Are 401k Audit’s Necessary

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The checklist below has been developed to aid in identifying basic information and documentation that is required as part of a 401 plan audit. Often, plan administrators are unfamiliar with what a 401 plan audit entails and what information needs to be gathered and provided to facilitate the audit.

The checklist isnt meant to be a comprehensive list, but rather a tool for identifying, locating, and providing information that is commonly requested for 401 plan audits. Not all plans are alike and some of the items may not be applicable to your specific plan.

While many items would need to be provided on an annual basis, there are also items which would only need to be provided for an initial audit engagement, unless they are amended or updated, such as plan documents, amendments, or an IRS determination letter.

The majority of the information listed in the checklist can be provided to us by the third-party administrator and custodian of the plans investments. We will also request from the plan administrator selected copies of reports generated from its HR and Payroll department as it relates to the 401 plan participants. These types of reports can be scanned and emailed, mailed, or faxed to us.

The checklist is divided into sections as follows:

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How Many 401 Audits Does The Auditor Do Each Year

Technically, any qualified independent accountant or CPA can do your 401 audit. But of course, not all 401 auditors are created equal. Youll want to ask: how many 401 audits do they do each year? Are 401 audits a side project for them, or are they a main focus of the firm? An experienced 401 auditor will likely have detailed processes in place to ensure that everything is done correctly, which greatly reduces the risk you run as the plan sponsor.

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