Many people think a 401(k) audit is only necessary for large companies, but that’s not always true. Even smaller businesses sometimes require an audit, and understanding when it is needed can help avoid potential issues. A 401(k) plan is a great way to help employees save for retirement, but it also comes with responsibilities for the employer. Knowing the audit rules is key to ensuring your plan complies with federal regulations. Let’s break down what a 401(k) audit is, when it’s required, and what you need to know to stay on top of these important rules.
What is a 401(k) Audit?
A 401(k) audit reviews a company’s 401(k) retirement plan by an independent auditor. This audit checks to ensure the plan is being managed correctly and that all financial statements and compliance requirements are met.
- Purpose: The main goal of a 401(k) audit is to ensure the plan complies with the Employee Retirement Income Security Act (ERISA) and the IRS regulations. It helps protect the rights of employees and ensures the plan is being administered fairly.
- What It Involves: The auditor examines financial statements, employee contributions, distributions, loans, and any fees associated with the plan. They also examine how the plan is managed and whether it follows all necessary rules and regulations.
- Outcome: The audit results in a report submitted to the Department of Labor (DOL) with the company’s annual Form 5500 filing. This report helps confirm that the plan is in good standing or identifies areas that need improvement.
Understanding the purpose and process of a 401(k) audit can help companies prepare better and ensure their plan is compliant.
When Is a 401(k) Audit Required?
A 401(k) audit is not required for every company, but there are specific situations where it becomes necessary:
- Employee Count: The most common reason a 401(k) audit is required is the number of eligible employees in the plan. Generally, an audit is required if your company’s 401(k) plan has 100 or more eligible participants at the beginning of the plan year. This count includes all eligible employees, not just those actively participating or contributing to the plan.
- Types of Participants Counted: Eligible participants include those currently contributing to the plan, eligible employees who have chosen not to participate, and even terminated employees who still have balances in the plan. It’s important to consider all these groups when determining if an audit is necessary.
- 80-120 Participant Rule: If your plan has between 80 and 120 participants at the start of the plan year and you filed as a “small plan” in the previous year, you can continue filing as a small plan and avoid an audit. However, if your participant count exceeds 120, you must switch to a “large plan” filing, which requires an audit.
- New Plans: If your company has just started offering a 401(k) plan, you generally don’t need an audit in the first year, regardless of the number of participants. However, planning for future audits is crucial if your participant count grows.
- Changes in Employee Numbers: If your company grows and the number of eligible participants increases to over 100, or if there is a significant reduction in participants, it might affect whether an audit is needed. Keep track of your participant count throughout the year to be prepared.
What are the Audit Requirements?
When it comes to a 401(k) audit, there are some key requirements that companies need to know:
- Hire an Independent Auditor: You need an independent and qualified auditor. This means the auditor has no financial ties to your company, ensuring an unbiased review.
- Review Financial Records: The audit will involve a thorough review of your plan’s financial records. This includes everything from participant contributions and distributions to loans and investment earnings. The aim is to ensure that every transaction is accurate and transparent.
- Check for Compliance: The auditor will also check whether your plan follows all the rules set by the Employee Retirement Income Security Act (ERISA) and the IRS. This includes ensuring contributions are deposited on time, and all plan documents are current.
- Submit a Report: After the audit, the findings are compiled into a report and submitted with your Form 5500 to the Department of Labor (DOL). This report is essential to show that your plan is well-managed and compliant.
Important Dates (for Calendar Year-End Plans)
If your company has a 401(k) plan that follows a calendar year-end, here are some key dates to remember:
- January 31: Send out Form 1099-R to any participants who took distributions last year. This form also goes to the IRS, reporting those distributions.
- March 15: This is the deadline to make corrective distributions if your plan failed the ADP (Actual Deferral Percentage) or ACP (Actual Contribution Percentage) tests, without facing a 10% excise tax.
- July 31: File your Form 5500. This form provides a detailed overview of the financial status, investments, and operations of your plan for the DOL. If an audit is needed, you must include the audit report with this filing.
- October 15: If you applied for an extension, this is the new deadline to file Form 5500.
Tips for Preparing for a 401(k) Audit
Getting ready for a 401(k) audit doesn’t have to be stressful. Here’s how to make the process easier:
- Get Your Documents in Order: Gather all the necessary documents early. This includes your plan documents, amendments, summary plan descriptions, payroll records, participant data, and investment statements. Having these ready can save a lot of time.
- Review for Compliance: Review your plan’s operations to ensure they align with ERISA and IRS guidelines. Ensure all contributions are timely, loans are documented, and all required participant notices are provided.
- Do a Pre-Audit Check: Consider conducting a mock audit or an internal review. This helps spot any potential issues before the real audit begins. Fixing these early can prevent bigger problems down the road.
- Stay in Touch with Your Auditor: Keep an open line of communication with your auditor. Ask them what documents they need and clarify any questions. This proactive approach can streamline the audit and ensure you’re fully prepared.
- Educate Your Team: Make sure everyone involved in managing the 401(k) plan understands the audit process and their roles. Proper training can help avoid mistakes and ensure everyone is ready for the audit.
Collaborate with GCK Accounting for Audit Planning
Planning for a 401(k) audit can feel overwhelming, but you don’t have to do it alone. At GCK Accounting, we specialize in helping businesses prepare for audits with ease and confidence. Our team works closely with you to organize your documents, review compliance, and identify any potential issues before they become problems. We provide clear guidance every step of the way, making the process straightforward and stress-free. Let us handle the details so you can focus on running your business smoothly. Contact GCK Accounting today to learn how we can support your audit planning needs.
Frequently Asked Questions
A 401(k) audit is typically triggered when a company’s plan has 100 or more eligible participants at the beginning of the plan year. This includes all employees eligible to participate, not just those actively contributing.
The main factor is the number of eligible participants in the plan. If your plan has 100 or more eligible participants, an audit is generally required to ensure compliance with federal regulations.
Yes, plans with fewer than 100 eligible participants are usually exempt from the audit requirement. Additionally, if a plan has between 80 and 120 participants and is filed as a “small plan” in the previous year, it may continue to avoid an audit under the 80-120 participant rule.
Companies can prepare by organizing all plan documents, reviewing financial records, ensuring compliance with ERISA and IRS rules, and conducting a pre-audit review to catch any issues early. Staying in close communication with the auditor can also help streamline the process.
If the 401(k) plan meets the audit criteria, typically based on the number of eligible participants, it must be audited annually. This is part of the annual Form 5500 filing requirement to the Department of Labor.