Wednesday, September 28, 2022

When Do I Need A 401k Audit

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What Are The Quality Requirements Of The Center

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In addition to the resources and information on current regulations and standards affecting audits, the Center requires our firm to adhere to significant membership requirements including designating a partner to be responsible for our employee benefit plan audit practice, meeting quality control standards and establishing annual internal inspection procedures. This inspection includes a review of our firms employee benefit plan audit practice by individuals with specific knowledge of ERISA employee benefit plan audits and standards. The review must be made available to our firms peer reviewer, who conducts a review and evaluation of our firms auditing and accounting functions so we can meet state licensing, federal regulatory and/or AICPA membership requirements. In addition, we must make our peer review findings publicly available.

K Audit Preparation Checklist

We understand that preparing for an audit can feel like an overwhelming task. Weve created this easy-reference checklist to help you gather the required documentation for a smooth audit. Heres what you will need.

  • An audit package with year-end reports for plan records.
  • A certification letter from the plan custodian or trustee.
  • A draft of IRS Form 5500.
  • Plan compliance testing results.
  • Plan activity occurring after the end of the plan year.
  • Contribution, rollover, and forfeiture information.
  • Documentation of cash and investments related to the plan.
  • Benefits payable and expenses.
  • Compliance documentation.

Your best option is to work with an experienced CPA firm to help you prepare for the audit. At Cook Martin Poulson, we work closely with our clients to help them prepare and gather the necessary documentation. In our role as a TPA, we provide our audit clients with a detailed checklist explaining what we need to complete the audit as quickly and painlessly as possible.

How Can I Plan Ahead

401 and other retirement plans must adhere to various rules and limitations defined by the federal government as well as the employer as stated in the plan documents. It can be a challenge to make sure you are complying with all that is required. Talk with your plan administrator or accounting advisor to plan ahead and help determine when your 401 or other retirement plan will need an annual audit.

For more information on this topic, or to learn how Baker Tilly employee benefit plan specialists can help, contact our team.

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How Do You Prepare For An Audit

Keeping track of plan-related documents throughout the year is one of the simplest ways to prepare for an audit. In addition to your plan document, be sure to have your most recent Form 5500, W-2s, loan requests, loan repayments, distributions, and other information related to your employees and their 401 activity.

For smaller companies who are experiencing steady growth, its important to monitor how many eligible participants you have in your plan. Planning will prevent any surprises and give you a head start in tracking the necessary documents leading up to your first audit.

Regardless of the size of your plan, be sure to lean on your 401 provider for assistance in gathering the necessary information for your auditor. They can also work directly with your auditor to reduce the amount of time you have to be involved in the project. Its important to thoroughly research this service provider beforehand to ensure a seamless audit, according to the Chief Executive Officer of ERISA Consultants, Richard Phillips.

Vet your service provider. Make sure youve done your due diligence so that you know you have good support from them and know they can provide the documents and records that are needed to make it a smooth audit process, Phillips states.

What Is The 80/120 Rule

Do You Need A 401(k) Audit?

This rule permits an EBP consisting of 80 to 120 participants on the first day of the plan year to file in the same category as the filing of Form 5500 in the previous year.

For example, if your EBP has 85 eligible participants as of the first day of the plan year, you would file Form 5500-SF. If, in the following year, your plan increases to include 110 active participants on the first day of the plan year, you would be able to file as a small plan despite the fact that your EBP now qualifies as a large plan.

The 80/120 rule only applies to an EBP of less than 120 active participants, so when you break this threshold, you must file as a large plan, regardless of your prior Form 5500 filings.

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When Will My Plan Require An Audit

The Employee Retirement Income Security act of 1974 requires that plan financial statements be audited by an independent auditor once a plan has more than 100 eligible participants at the beginning of the plan year. The exception to this rule is the 80-120 rule which allows for smaller organizations to avoid the audit requirement to focus on growth. If you have between 80 and 120 eligible participants and have historically been considered a small plan , you are eligible to continue filing a short form until such time that the plan exceeds 120 participants at the beginning of the plan year. Once the plan exceeds 120 participants, you will be required to file as a large plan. Once this requirement has been triggered youll be required to continue filing as a large plan as long as you have 100 or more participants as of the beginning of each plan year.

What Is A 401 Audit And Why Is It Needed

Briggs & Veselka provides audits for plans subject to the Employee Retirement Income Security Act regulations under the U.S. Department of Labor regulations, as well as SEC 11-K filings.

Once the number of 401 plan participants surpasses 100, the IRS requires:

  • An annual Form 5500 to be submitted
  • An audit of the plan to be performed and attached to the annual Form 5500

If these items are not performed, the IRS can assign fees on a per daily basis for lack of Form 5500 alone.

We are in the top 1.5% of firms in the country providing employee benefit plan audits to over 170 plans unique for a firm of our size.

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What Are The Top 5 Things I Should Do To Help Prepare For An Audit

  • Review the census to ensure it is complete, accurate and ties to the W-2 wages.
  • Ensure that the Non-discrimination testing is complete, and any action items are cleared and documented.
  • Communicate with your Recordkeeper or Third-Party Administrator to ensure that the audit package is being prepared
  • Review remittances to the Recordkeeper or Third-Party Administrator for contributions to ensure that were made timely and none were missed .
  • Determine whether all plan amendments and changes are documented, communicated, implemented, and memorialized in the Committee Minutes.

Audits: Answers To Frequently Asked Questions

How to Survive a 401(k) Audit

When a business reaches a certain number of eligible participants for their 401 plan, federal law requires an independent audit of that retirement plan. Larger companies are more accustomed to this annual requirement. However, owners and managers of growing businesses may never have experienced a 401 audit or don’t know enough about it.

You probably have a lot of questions if youre about to undergo an audit for the first time. At what point is an employer required to complete a 401 audit? What is an “eligible participant,” and why is this important? Who performs the audit, and what documents do they need?A little homework will help you determine whether or not a 401 audit is required. Plus, itll help you better prepare for one.

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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.

Audit Requirements: Do You Need A Large Plan Audit

The annual 401 audit is required for all large plans – meaning those with 100 or more eligible participants. Your annual 401 plan audit is often called the Large Plan Audit for just that reason.

Now, even if you have 100 participants, theres a chance you dont even have to bother with the Large Plan Audit this year. How? Thanks to…

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How Much Does A 401 Audit Cost

If your companys retirement plan meets the 401k audit requirements as set out by ERISA, then you must hire a third party administrator to carry out the audit. At Cook Martin Poulson, we conduct 401k audits on a regular basis.

The cost of a 401 audit is difficult to predict, since it depends largely on the size of the 401 plan being audited and the complexities of the situation. The third party administrator you hire should assess the situation and what it requires and provide a quote thats commensurate with the job.

We work closely with our 401 audit clients to arrive at a quote for the audit and explain it. We will be happy to discuss your audit needs with you.

If An Audit Of Your 401 Plan Is Required Betterment Can Help You Understand What To Expect And How To Prepare

IRS Archives

By Mikang Kim, QKA

The Employee Retirement Income Security Act of 1974 requires that certain 401 plans be audited annually by a qualified independent public accountant subject. The primary purpose of the audit is to ensure that the 401 plan is operating in accordance with Department of Labor and Internal Revenue Service rules and regulations as well as operating consistent with the plan document, and that the plan sponsor is fulfilling their fiduciary duty.

A 401 plan audit can be fairly broad in scope and usually includes a review of all of the transactions that took place throughout the plan year such as payroll uploads, distributions, corrective actions, and any earnings that were allocated to accounts. It will also include a review of administrative procedures and identify potential areas of concern or opportunities for improvement.

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Does Your Company Fall Into The 80

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.

Deposit Review & Participant

What the auditor does in step 2: Analyzes essential details about benefit plan financial transactions and employee plan participation. This information is reported in two spreadsheets: the 401 Deposit Report , and Participant-Level Requests.

What the plan administrator does in step 2: Fills in the information in the required in these two essential spreadsheets. Heres what’s required from you for each:

401 Deposit Report:

This is essentially a focused look at the money deposited into the plan. In this report, the auditor is looking for

  • Transmission Times: How long it took to transfer contributions from payroll to the 401 provider
  • Transmission Amounts: Any discrepancies between the amounts reported in payroll and the 401 provider

Heres what one of these reports might look like:

Putting together this report can be a tiring and tedious process for plan administrators, because getting the information for this report usually means pulling one report from payroll AND one report from the recordkeeper for every date you ran payroll.

Every. Single. Date.

That adds up to a lot of data. If you have a bi-weekly payroll schedule, thats 52 reports you have to pull just to fill in this spreadsheet. And that doesnt even count any off-cycle payroll runs you might have for bonuses, missed payments, or reimbursements.

Participant-Level Sampling:

  • Payroll
  • 401 loans
  • Any payments or disbursements made by the plan

Heres an example of what the 401 auditors requests may look like:

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What Does A 401 Audit Encompass

The determining factor for whether your 401 plan needs an audit depends on the number of participants in the Plan on the first day of the Plan year. First, you must determine whether the 401 Plan is considered small or large under the Employee Retirement Security Act of 1974 .

A 401 Plan is generally considered small if it has less than 100 eligible participants at the beginning of the Plan year and the Plan sponsor may be eligible to file Form 5500-SF. If the 401 Plan has more than 100 eligible participants as of the beginning of the Plan year, then it would generally be considered large and the Plan sponsor should file the Form 5500, which would then require audited financial statements as an attachment to the Form 5500 submission. However, there is an exception to the general rule, which is commonly referred to as the 80-120 rule, which allows for growing Plans with between 80 and 120 participants, as of the first day of the Plan year, to file the Form 5500 in a consistent manner as indicated on the prior year Form 5500 filing. Once you have exceeded 121 participants, the Plan must file as large and an audit is required. If it is determined by the administrator that the Plan requires an audit, there are two types that the administrator can instruct the auditor to perform:

Within both types of 401 Plan audits, the following is a high-level look into the various areas of the Plan that an auditor will test:

How Is Form 5500 Filed

401k Plan Professionals Webinar Series: Understand Your Retirement Plan Audit

At the start of filing your Form 5500, you first need to identify which type you need to submit. As detailed above, you may be required to submit Form 5500 or Form 5500-SF or you may submit Form 5500-EZ if your EBP is maintained outside the U.S. or if you have an owner-only plan.

After selecting the appropriate type of Form 5500, you must file it through the use of the ERISA Filing Acceptance System program.

Next, you need to complete your Form 5500, which is three pages long and requires details such as the number of active participants in your plan, the starting date of your plan, information concerning the benefits and funding of the plan, details about the plan administrator, and the necessary schedules.

Be aware that the schedules you will be responsible for depend on the specific characteristics of your EBP. It is crucial to submit your Form 5500 by the deadline and include all relevant schedules to avoid processing delays or potential penalties.

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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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What Documents Are Needed For A 401 Audit

A large number of documents are required to conduct a 401 Audit. We will request some information from the employer and some from the recordkeeper and/or custodian. We use a tool called Smartsheet to request and receive the documents securely. To the right are listed some of the items usually requested.

Note: We provide an email facility to submit the information securely to us.

  • Bank statements showing plan deferrals and company contributions made to the Trust
  • Information questionnaires
  • Plan document, adoption agreement, and all amendments
  • IRS determination letter or opinion letter
  • Type ll SOC l Report, formerly SAS 70 report
  • Summary plan description
  • List of all parties in interest.
  • Discrimination test results and detailed schedules
  • Form 5500 with all supporting schedules
  • Distribution forms for selected distributions during the Plan year
  • Loan documents for selected participant loans
  • A schedule of deposits to the Plan on a pay period basic
  • Forms W-2 or other annual payroll registers and reports
  • Form 1099 for distributions

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What Are The Common Governance Responsibilities

As a plan sponsor, you should keep an updated Fiduciary File documents which includes current copies of plan documents and disclosures. These include:

  • Adoption Agreement, Basic Plan Document , and Plan Sponsor Fee Disclosure notice)
  • Vendor and Advisory Service Agreements
  • Participant Disclosures and Notices
  • Retirement Committee Meeting minutes and material
  • Documentation on any plan corrections
  • Annual testing, audited plan financials, and Form 5500
  • Any IRS or DOL communications

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