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When Is An Audit Required For A 401k Plan

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Mistakes To Avoid With Your Internal 401 Audit:

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

Youve heard that an auditor may identify issues with your 401 plan during an audit. The good news is that youll be given the time and chance to correct these issues if they pop up. And heres some even better news: At DHJJ, we know exactly what to look out for, because we see a lot of the same errors frequently repeated, often through no fault of the company being audited. Here are a few of the most common items to watch out for:

Compliance with Plan Definitions: Take a look at your 401 plan documents. Do they define the kinds of compensation used for the determination of employee matching contributions and deferrals? Specifically, consider your plans definition of eligible compensation. Does it include examples? Use this definition to determine whether eligible compensation under your plan includes compensation such as bonuses, commissions, or overtime. Failure to adhere to your plans specific definition leads to errors. If youve realized that you have not been in compliance with your plans eligible compensation definition, check out the IRS guide to correcting this common error. Corrective contribution is still possible.

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.

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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Traditional 401 Vs Roth 401

There are two types of 401 plans: Traditional and Roth 401s.

The traditional 401, named after the relevant section of the IRS code, has been around since 1978.

With this plan, any contributions you make to the 401 account will reduce your income taxes for that year and will be taxed when they are withdrawn.

Roth 401s, named after former senator William Roth of Delaware, were introduced in 2006.

Unlike a traditional 401, all contributions are made with after-tax dollars and the funds in the Roth 401 account accrue tax free.

Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings.

Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.

When Is A 401k Audit Required In California

Everything You Need to Know About 401K Audit Requirements

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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When Do I Need An Audit

An audit isnt something you want to do unless required, right? For starters, you wont need to do an audit if you started the plan year with less than 100 eligible participants. But even if you cross the 100-participant threshold, see if you qualify for an exemption under the 80/120 Participant Rule, so that you dont waste your time. This rule states that you can continue to file the Form 5500 within the same category as you filed the previous year as long as there are between 80 and 120 participants at the beginning of the plan year. So, if you didnt have to do an audit last year, but then reached 105 participants this year, you still wont have to do an audit. It will remain that way until you exceed 120 participants at the beginning of the plan year.

What Happens In The Audit

Once you have determined what type of audit you need, Schedule H filers need to find an IQPA and get your audit completed by the Form 5500 filing deadline.

The IQPA will audit the plans financial statements, including procedures around investments audit), eligibility, contributions, loans, benefit payments, administrative expenses, and other areas as deemed necessary. The audit procedures will not only be performed as required under Generally Accepted Auditing Standards , but will also take into consideration certain requirements of ERISA.

Part of the audit procedures will include documenting and assessing the internal controls of the plan. Informally during the audit, and formally at the completion of the audit, your auditor may provide recommendations for improvements in internal controls, plan processes or procedures, resolutions for errors noted, and other matters. Your plan auditor will also provide other formal, required communications at the completion of the audit.

Once your audit is complete and your auditor has issued the final opinion on the financial statements, attach your IQPAs report to your Form 5500 filing and electronically file your 5500.

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What Does An Audit Encompass

While each audit is a little different based on the plan design, the CPA will typically cover the following issues:

  • Review of the 401 plan document to determine that the plan is compliant and functioning consistent with IRS and DOL rules.
  • Examine any amendments made during the plan year.
  • Verify that the information included on IRS Form 5500 is accurate and complete.
  • Review and assess how the business maintains its electronic 401 records.
  • Test employee contributions to ensure funds are remitted accurately and timely.
  • Confirm that any distributions or rollovers were paid out properly and timely
  • Sample selected participant transactions to obtain comfort that overall participant activity is accurate.
  • Interview company management to ascertain that the plan is properly functioning.

The audit process can be excessive. It can last 30-60 days, depending on the plans size and complexity. For this reason, the average 401k audit can cost $5,000 to $10,000. Of course, this is an average with some companies with thousands of employees who face large audit bills.

Getting An Extension For Your 401 Audit

When and Why Your Company Needs a 401(k) Audit

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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New Financial Audit Rule Increases Requirements For Plan Sponsors

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Retirement plan sponsors that are required to submit a financial audit with their Form 5500 filings next year will find they have more responsibilities related to the audit.

In July 2019, the American Institute of Certified Public Accountants issued a new audit standard for employee benefit plans, SAS 136, or Statement on Auditing Standards No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA . SAS 136 was originally effective for periods ending on or after December 15, 2020 however, due to the COVID-19 pandemic, the effective date was delayed to this coming December 15.

Timothy Verrall, a shareholder in law firm Ogletree Deakins Houston office, notes that the effort to enhance audit requirements has been in the works for years. The 2010 ERISA Advisory Council studied employee benefit plan auditing and financial reporting models and found that many deficiencies in limited-scope audits of retirement plans might be due to misunderstandings. In a 2011 report, the council concluded that the limited-scope audit should not be repealed, but its quality and required certifications should be reinforced and strengthened.

The agency found some were deficient based on audit standards and some were deficient by ERISA standards, Verrall says. Audit quality was all over the place. Information was not getting assessed correctly, and noncompliance was not getting surfaced.

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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Which Retirement Plans Need To File A Form 5500

Generally, all plans must file a Form 5500. For example, plans must file one of the three versions of Form 5500:

  • Form 5500 for plans with 100 or more participants,
  • Form 5500-SF for one-participant plans and plans with 99 or fewer participants , or
  • Form 5500-EZ Retirement Plan) for one-participant plans only.

How Can I Minimize The Audit Workload

The Last 401(k) Audit Checklist You

To do an audit, an independent auditor is required. Independence, in this case, means the auditor cannot have additional ties to your company or the plan. For example, if the auditor does the bookkeeping, accounting, financial statements, or other audits for you, they would not be considered independent. Most likely the auditor wont know much about your plan unless they audited your plan in a previous year. It is the auditors job to learn enough about your plan to be able to conduct a thorough audit. To do this requires work. But it doesnt necessarily have to require tons of work on your end. You may be able to get your service providers to help with some of that work. For example, a record-keeper or TPA may be able to provide plan documents, financials, payroll data, valuations, and more to the auditor. If they dont want to help you, you may want to find new service providers for the next plan year.

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What Does The Audit Look For

The 401 plan audit is mandated by the Employee Retirement Income Security Act and is intended to make sure a plan is being run correctly.

The audit seeks to:

  • Review 401 plan documents and verify the 401 plan is compliant with the IRS and DoL rules.
  • Determine the accuracy of info reported in the plans Form 5500 and 401 financial statements.
  • The Internal Revenue Service and Department of Labor regulate and enforce the submission of the 401 audit. Essentially, they want to be sure that your plans in compliance with regulations, and that its free of mistakes that may affect participant benefits.

    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.

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    What Is An Eligible Participant In A 401 Audit

    An eligible participant in a qualified 401 plan is one that can, by law, contribute to the plan. There are two groups of individuals that could fall into the category of eligible participant. They are:

  • Current Employees: A participant may be eligible whether they actually participate in the 401 plan or not. Check your 401 plan documents for exact information and in-depth guidance on eligibility requirements, including rules about the duration of an employees tenure with your company.
  • Former Employees: Former employees who have money in your companys 401 plan are generally eligible participants.
  • What Is A 401k Audit

    2022 CPA Audit Exam-Audit of Employee Benefit Plans by Darius Clark

    A 401k audit ensures that your companys 401k plan complies with the requirements set in the plan and with regulations set by the Department of Labor and IRS. Your Form 5500 and financial statements are also evaluated in order to guarantee the information you have provided is accurate.

    The importance of the audit lies in finding any non-compliant parts of your plan, so you can make corrections for the financial safety of your company and employees.

    Due to the extensive nature of this audit, it can last anywhere between three to four months depending on the specifics of your company.

    401k audits are performed by a CPA or auditor independent from your company so that unbiased and objective results are given.

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    Large Plan Audit Due Date

    The financial statement you receive at the end of your 401 audit should be submitted together with Form 5500, 7 months after the end of your plan year. For those of us using the calendar year, thats July 31st.

    Now, fortunately, because the plan audit is submitted alongside Form 5500, the two share an extension option. Which leads us to…

    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:

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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:

    K Audit Requirements For Plan Administrators

    401(k) Benefit Plan Audits: What You Need to Know

    Published by Adam Haleon Aug 23, 2012 7:00:00 AM

    Each year, it is the responsibility of the employee plan administrators to ensure that the 401k plan is in compliance. Businesses that manage 401k plans for 100 or more participants are required to engage the assistance of a qualified outside accounting firm to perform an independent plan audit. The CPA firm records its findings on form 5500 and files it with the IRS. The purpose of these 401k audit requirements is to ensure that the employee 401k plan is administered impartially to all plan participants and to confirm the plan is viable financially.

    Generally, the plan administrators must complete and file Form 5500 by the last day of the 7th month following the end of the plan year. If an employer decides to terminate a plan, the plan administrator must file form 5500 by the 7th month from the date of termination of the plan. A business wanting an extension must file form 5558 by the original due date of form 5500, in order to gain a 2.5-month extension.

    The outside auditor must be licensed by the states accountancy licensing body in order to complete any and all 401k audit requirements. It is highly recommended that you hire an experienced auditor who is a disinterested party, meaning, the auditor has no financial interest in the business or the employers 401k plan.

    The goal of a plan audit Is to:

    *To ensure that the 401k plan is administered equitably.

    *To confirm that the plan is financially viable.

    Audit Deadline

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