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A 401k audit is an audit that is conducted in relation to a plan’s financial standing. A retirement plan that differs from a pension plan in that it is funded by the employee rather than the employer. There are various legal requirements that should be followed in relation to whether and how a plan needs to be audited. This article will therefore look at what determines its necessity, how often it should take place, and just who it is that will conduct it. In relation to your audit requirements, there are companies online who can help.
Is it mandatory?
A 401k plan audit is required to take place by law because it has been mandated by the ERISA (European Retirement Income Security Act). It is required to ensure that a plan is being run correctly for everyone’s protection. The aim of the audit will be to review the company’s plan documents and then to verify that the plan complies with the IRS and DoL rules. With larger plans, it is submitted alongside the plan’s Form 5500.
Is it also about numbers?
Should a company’s plan on the first day of the plan year have 120 eligible participants, then an audit is required. Then, once this audit has taken place, the company’s 401k plan must continue to be audited unless their eligible participants should drop to below 100.
However, there is the 80-120 rule, as it is commonly referred to, which states that the participant count can rise to 120 without an audit being required. This is to help small to medium-sized businesses who are trying to grow. It is always worth checking with a specialist auditing company whether by law you are required to have one.
How often should it take place?
The 401k audit should take place annually by law. It will take between 6-8 weeks to complete. This is the industry standard in relation to CPAs completing the 401k audit. The process will normally include a brief review and information request stage, followed by 2-4 hours of information-gathering interviews, then a client view in respect of the preliminary audit report produced. To conclude, there will then be the final delivery of the audit report. This is the procedure that needs to be gone through and a company will need to be patient while this takes place.
How far back can the IRS audit a plan?
Generally, a company is required to retain its 401k plan records for a period of at least six years following the filing date of the IRS Form 5500 that has been created from those records.
Who can conduct one?
A 401k audit should be conducted by a qualified accountant who is independent of the company concerned. Specialist firms can be found online who can conduct this audit for your company in accordance with the requirements of the law.
So, to summarize, there are several specific requirements in relation to a 401K audit. These all need to be followed to stay within the law. If you require further information, the companies online will be more than happy to guide you through the process and its requirements. Then, once you have found one, you can call upon the same company that you know and trust to conduct your audits on an annual basis.
Apart from the mandatory requirements, it can trigger an audit if you are spending and claiming tax deductions in relation to a large portion of your income. It is also known that a trigger will result from taxpayers who itemize. Often audits can be triggered by deceased or terminated participants remaining in the plan with balances that will contribute to the participant count.
To read a further article on 401k audits, click here.