When Does A 401k Plan Need An Audit

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 CMP, 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.

What Is The Goal Of A Plan Audit

Plan sponsors fulfill their fiduciary responsibility of compliance when meeting the audit requirements of their retirement plan.

An audit may also provide insight as to the plan sponsors control environment of the plan processes or lack thereof may uncover operational errors or identify prohibited transactions. These occurrences should result in plan remediation and corrections providing the plan sponsor with success in administration and management of the plan.

Auditors consider several questions in their analysis, including:

• Do all eligible employees have the same opportunity to participate?
• Are assets of the plan fairly valued?
• Have contributions to the plan been made in a timely manner?
• Are accounts of the participants fairly stated?
• Were benefit payments made according to the terms of the plan?
• Were there any issues identified that may impact the plans tax status?
• Have there been any transactions made that are prohibited under ERISA?

What Is Involved In A 401k Audit

During your audit, your companys plan-related documentation will be reviewed and analyzed.

The auditor will make sure that the plan is performing within the requirements determined by the plan itself while also remaining compliant with the government regulations required by the IRS and DOL.

Plan-related financial statements and Form 5500 will then be reviewed and checked over, ensuring that all information is correctly reported.

When drilling into specifics, auditors will be looking for details such as:

• How your company maintains its 401k records
• If distributions and rollovers were paid out correctly
• If employee contributions were processed in a timely manner

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Finding A Quality Plan Auditor

For the process to go smoothly and correctly, its important to find a first-class plan auditor. Verrall says the AICPA website has resources for finding quality plan auditors. The site gives an indication of whether auditors focus on and care about retirement plan audits.

DeMay says a starting point is the AICPAs Employee Benefit Plan Audit Quality Center . Many firms that specialize in employee benefit plan audits are members of the center.

When looking for a good auditor, DeMay says plan sponsors should recognize the need for knowledge of employee benefit plans.

There are a lot of changes and clarifications in the new standard that fall to auditors specific to employee benefit plans. Plan sponsors need someone with that expertise, he says. A lot of firms have strong audit practices in a variety of industries, but that doesnt necessarily translate to employee benefit plan audits. DeMay suggests that plan sponsors interview audit firms that have an employee benefit specialty practice area.

Verrall says some audit firmsboth large and smallare really known for their work in doing retirement plan audits. He notes that some small firms are cheaper than big ones, but plan sponsors will get a higher-quality audit if thats all the firm does. He adds that bigger firms might give a more perfunctory audit. Plan sponsors need to consider whether they want to figure out their plans issues or minimally comply with DOL requirements.

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When Is An Audit Required

A business must have its 401k plan audited if they have 100 or more eligible plan participants. However, a specific rule called the 80-120 rule allows a company to postpone an audit until it begins a plan year with 121 or more eligible participants.

While the plan itself may be considered a large plan once it hits the 100 participant threshold, the company may defer the audit requirement for a couple of years. This can give the company a nice break.

However, the plan is a large plan once is passes the 120 eligible participant threshold. At this point, an audit can no longer be avoided unless the eligible participant threshold dips back below 100.

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Large And Small Benefit Plans

The reporting for employee benefit plans is done via the IRSs Form 5500. It should be filed at the end of each fiscal year by your plan administrator. Two versions of the form exist. 1) The long version Form 5500 for large benefit plans, and 2) The short version for small benefit plans with fewer than 100 eligible participants at the beginning of the plan year. The number of plan participants includes eligible employees, active participants, and separated or retired employees who now receive benefits under the plan.

Must Form 5500 Information Be Disclosed To Plan Participants

Yes. Participants must receive a Summary Annual Report . The SAR is a summary of the Form 5500. It must include the following information:

• Administrative fees paid from plan assets
• Distributions paid to participants and beneficiaries
• The total value of the plan
• Each participants right to request a full copy of the Form 5500

The deadline for distributing the SAR to plan participants is the later of: 1) nine months after the end of the plan year or 2) two months after the Form 5500 was due .

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External Audits Are Good Insurance

The 401 and 403 plans filed as large plans must be audited by an independent accounting firm. Audits such as these ensure you are running your employee retirement plan in accordance with the Department of Labor and IRS requirements. At the same time, as the plan owners, you will always have fiduciary responsibility over your plan regardless of size. So, an external audit, even for smaller plans provides extra insurance that you are acting on behalf of the plan members.

Does Your 401 Plan Need An Audit A Closer Look At The 80

Generally speaking, 401 plans with fewer than 100 participants at the beginning of the plan year are considered small employee plans and eligible for the Small Plan Audit Waiver. However, the Department of Labor has identified the range of 80 120 participants as a grey area where the company has the option to continue as a small employee plan or elect large employee plan status. Please note all large plans are required to be audited annually. The following chart illustrates the choices a company has when it falls into the 80 -120 participant range:

The number of participants at the beginning of the current year is determined by the number that was reported on Line 7 of Form 5500 in the prior year.

For a plan to be eligible for the Small Plan Audit Waiver, the following conditions must be met:

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K Plan Audits Part : Does Your Company Require One

When a business reaches a certain number of eligible participants for their 401 plan, federal law requires an independent audit of the plan. While larger companies may be familiar with this process, many small business owners may find themselves in uncharted territory the first time their number of eligible participants increases above the threshold amount. In this 3-part blog series, well cover the basics of 401 plan audits.

What is a 401 Plan Audit?

The Employee Retirement Income Security Act of 1974 first mandated the annual audit of 401 plans after carmaker Studebaker terminated their pension plan in 1963, leaving workers without retirement funds. The primary objective of the audit is to ensure that the plan complies with government regulations and company-specific requirements, allowing you to take corrective action on any parts of your 401 plan that are found to be not in compliance, and therefore minimizing risk to your employees and your company.

Requirements & Eligibility

What is the 80-120 Participation Rule

If your plan reaches 120 eligible participants, and requires an audit, the audit threshold for eligible participants during future years drops to 100 eligible participants.

My company has 120+ eligible participants, now what?

How Do You Prepare For An Audit

The simplest way to prepare for an audit is to keep track of plan-related documents throughout the year. In addition, audit document requirements include the most recent Form 5500 as well as W-2s, loan requests, loan repayments, distributions, and other information related to your employees and their 401 activity.For smaller companies experiencing steady growth, its important to monitor the number of 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 consult your 401 provider for assistance in gathering the necessary information for your plan auditor. They can also work directly with your auditor to reduce the amount of time youre involved in the project. According to the Chief Executive Officer of ERISA Consultants, Richard Phillips, its important to thoroughly research your service provider beforehand to ensure a seamless audit.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.

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Why Are Plan Audits Required

An annual audit is required by federal law to protect the best interests of all plan participants.

This requirement is to ensure a plan is operating in compliance with federal regulations set by the IRS and DOL . The regulations are in place to ensure that plan documents and financial information are reported accurately and in a timely manner.

If you need an external 401 audit for your plan, consider a specialized firm like Anders CPAs + Advisors. We can provide a quality benefit plan audit that is efficient and accurate. For more information on how we can help, request a free consultation. For assistance, contact the team at -886-7913 to schedule an appointment.

How We Can Help

A 401 audit can offer beneficial insights that can lead to process improvements and stronger internal controls for your plan. CLA is one of the leading providers of in the country, and we offer compliance and consulting services that can unlock opportunities for more comprehensive results.

Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

CliftonLarsonAllen is a Minnesota LLP, with more than 120 locations across the United States. The Minnesota certificate number is 00963. The California license number is 7083. The Maryland permit number is 39235. The New York permit number is 64508. The North Carolina certificate number is 26858. If you have questions regarding individual license information, please contact .

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How Many Employee Participants Are In Your Companys 401k

The first 401k audit requirement has to do with the number of eligible participants in your 401k plan. The short explanation is that your plan must be audited if it has 100 or more eligible participants.

When it comes to auditing employee benefit plans, the word eligible is important because eligible employees who choose not to participate in your 401k plan still count toward the audit requirement.

How To Choose A Tpa For Your 401k Audit

If you want to have an uneventful audit, you must hire the right TPA to complete the audit. Here are some pointers for choosing the right TPA.

• Ask about the TPAs auditing experience and make sure they have experience with auditing plans like yours.
• Get information about their pricing structure and how much it will cost to conduct the audit.
• Ask for references and call them before you sign a contract.

Your TPA is the one who will prepare your audit for the IRS to review. Its essential to choose a company with the right experience.

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What Are The Penalties For Not Filing The Form 5500 Timely

Unfortunately, most employers dont realize they missed a Form 5500 filing until they receive a letter from the IRS or DOL about it which can be a year or more after the 5500 was due. By that time, substantial penalties will have already accrued. Late Form 5500s are subject to the following IRS and DOL penalties:

• The IRS penalty for late filing of a 5500-series return is $25 per day, up to a maximum of $15,000.
• The DOL penalty for late filing can run up to $1,100 per day , with no maximum.

However, employers who have not yet been notified by the DOL about their missing Form 55500 can file a late return using the DOLs Delinquent Filer Voluntary Compliance Program to pay a lower, flat penalty amount.

Under the DFVCP, the maximum penalty for a single late Form 5500 is $750 for small 401 plans and $2,000 for large plans. The DFVCP also includes a “per plan” cap. The “per plan” cap limits the penalty to $1,500 for small plans and $4,000 for large plans regardless of the number of late Form 5500s filed at the same time.

Which Employees Are Eligible For Your 401k Plan

The following types of 401k plan participants are considered eligible under IRS rules and will be counted toward your 100-participant threshold for a 401 audit.

• Active employees. This category covers both employees currently covered under the plan as well as those who are eligible but who do not currently participate in the plan.
• Retired or separated. This category includes retired plan participants who either receive plan benefits or are eligible to receive said benefits. It also includes employees who have left your employ but still have active plans with you.
• . This category includes deceased former employees with one or more beneficiaries who receive plan benefits or are entitled to receive plan benefits.

Eligible employees are counted if they fall into one of the above categories as of the end of the prior tax year.

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Do You Need A 401k Audit

We started our plan in the middle of the year: Do we need an audit for this year?

Yes, if you have over 100 eligible participants when the plan was formed. However, if the first plan year is shorter than 7 months in duration, you may elect on Form 5500 to defer the audit of the first, short year until the audit is performed for the first full year plan year.

We terminated our plan, do we need an audit?

A common misconception regarding plan terminations is that a plan is terminated when the board of directors resolves to terminate the plan or the date that the company notifies its employees. In fact, plans are not officially terminated until the date that a final distribution of assets is made, and there are no longer any participants in the plan. Plans that are in the process of termination must continue to have an audit and also continue to file the Form 5500. A final Form 5500 and audit is required within 7 months of the termination date.

Help! We received a letter from the IRS / DOL telling us we need an audit and we owe a penalty!

Contact us we can help. We will advise and assist with your IRS / DOL correspondence. Should an audit be needed, we can complete it quickly and efficiently.

Hardship Distribution Eligibility Errors

Employees who need financial help due to an immediate need can apply for a hardship distribution. This option grants them access to a limited amount of funds in their retirement plan. A hardship distribution should only be enough to cover the financial need, and the employee has to show that they werent able to obtain funds elsewhere. Plan sponsors often make the mistake of approving hardship distributions for employees who dont qualify for one.Whats more, some plans state that participants cannot contribute to the plan for a certain number of months after receiving a hardship distribution. The participants and the administrators may not be aware of or forget about this rule.The only way to rectify this mistake is to speak to the participant who didnt qualify for the hardship distribution and have them return the amount along with earnings when possible. If the participant continued to make payments immediately after receiving the funds, use the contributed amount to account for all or a portion of the invalid distribution.

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What Comes After The 401 Audit

Once your independent 401 audit is completed, you’ll attach the report to Form 5500. All businesses with 401 plans must file Form 5500 Annual Return/Report of Employee Benefit Plan. This annual report, registered with the Department of Labor and the Internal Revenue Service , provides information on your 401 or other benefit plans.Information collected includes the type of plan, the plan sponsor’s information, the plan administrator’s information if it’s different, and the number of participants. It’s the source for determining whether your plan is considered small or large and whether you’ve crossed the eligible participant threshold and will be required to complete an annual audit going forward.Form 5500 comes with a dizzying 28 pages of instructions. Luckily, your 401 provider, along with your independent auditor, will take care of the tricky work to fulfill this annual requirement.