When your business reaches a threshold number of participants who are eligible to participate in your 401(k) plan, your organization will be required by national law to conduct an independent audit of your retirement plan. Big corporations may have been doing this for years, but for growing firms facing their first 401(k) audits, the transition can be a bit rough. Your business has grown, and that’s great news. But as with anything in life, you may have been met with a few growing pains. DHJJ’s tax, audit, and accounting experts are here to help. Read on to learn more about 401(k) plan audit requirements from DHJJ.
What is a 401(k) Audit?
In brief, a yearly 401(k) audit is an analysis performed regarding a company’s 401(k) plan. Usually, it’s conducted by an external auditor pursuant to the laws of ERISA (the Employee Retirement Income Security Act of 1974). Among other things, ERISA sets forth standards for the benefits provided by businesses, including healthcare and retirement plans. The purpose of an audit is to make sure that the retirement plans you’re offering to your employees are compliant with ERISA, IRS laws, and United States Department of Labor regulations.
After performing an unbiased audit, your organization will be able to identify any compliance concerns, and can then make the required adjustments to your retirement plan to bring it into compliance with federal law.
401k Audit Requirements:
A comprehensive 401(k) audit encompasses a review of several items, including the following:
- Your 401(k) plan documents and any amendments during the last fiscal year
- Your Form 5500, which is reviewed for accuracy
- 401(k) financial statements
- Your company’s process for storing and maintaining digital records pertaining to your 401(k) plan
- Employee contributions
- Remittance dates (to ensure the timeliness of fund remittance)
- Distributions and rollovers
- Possible a random selection of individual participant transactions for further compliance review (“spot checking”)
- Possible interviews of company managers
How Long Will a 401(k) Audit Take?
The length of your company’s specific audit process will vary based on a multitude of factors, including your company’s internal data organization, plan size, and any compliance concerns that arise during the audit. All in all, the intensive external audit process can last up to four months.
What is an “Eligible Participant” in a 401(k) Audit?
An “eligible participant” in a qualified 401(k) 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(k) plan or not. Check your 401(k) plan documents for exact information and in-depth guidance on eligibility requirements, including rules about the duration of an employee’s tenure with your company.
- Former Employees: Former employees who have money in your company’s 401(k) plan are generally eligible participants.
How Do I Know if I am Required to Conduct a 401(k) Audit?
In short, companies who have a total of 100 (or greater) eligible employees must conduct a 401(k) audit. These companies are considered to have “large plans.” The measurement of eligible employees should be taken on your 401(k) plan year’s first day.
Some businesses have a high degree of variation over the course of the year in terms of their plan’s number of eligible participants. If your plan’s eligible participant count varies between 80 and 120 participants, you may be able to stave off the need to conduct an audit until you begin a 401(k) plan year with over 120 eligible participants. Always check with a tax, audit and accounting expert to make certain of your need to conduct a 401(k) audit.
Getting Ready for a 401(k) Audit:
So, you’ve determined that you need to conduct a 401(k) audit. It’s true what they say: the best defense is a good offense. When it comes to getting ready for your 401(k) audit, start early and get organized. Doing so can make the audit process faster, more affordable, and easier down the road.
Throughout the year, maintain all documents related to your 401(k) plan in the same place, whether that’s in a physical, tangible record keeping system, or in a digital space. Here are some of the key documents you’ll need to keep track of:
- Form 5500s
- Loan requests
- Loan payment documents
- Distribution information
- W-2 forms
- All other documents related to your 401(k) plan.
Mistakes to Avoid with Your Internal 401(k) Audit:
You’ve heard that an auditor may identify “issues” with your 401(k) plan during an audit. The good news is that you’ll be given the time and chance to correct these issues if they pop up. And here’s 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(k) plan documents. Do they define the kinds of compensation used for the determination of employee matching contributions and deferrals? Specifically, consider your plan’s 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 plan’s specific definition leads to errors. If you’ve realized that you have not been in compliance with your plan’s eligible compensation definition, check out the IRS guide to correcting this common error. Corrective contribution (i.e., reallocation or distribution) is still possible.
Eligibility Errors: One of the most common eligibility errors within 401(k) plans concerns the “hardship” distribution. Employees are eligible for a hardship distribution when they need immediate financial assistance, but they’re often approved for the distribution too easily, without proper due diligence having been conducted. Through this type of distribution, employees can receive a limited amount of money from their 401(k). The distribution made should not exceed the actual employee need, and the employee should be able to prove they don’t have funds available from another source. This error can be corrected if the employee returns the amount borrowed from their 401(k).
Always Reach Out to An Audit Expert.
Don’t know where to start with your upcoming 401(k) audit? Start by reaching out to an expert, and take the stress out of the remainder of the process. At DHJJ, our auditors are here to help.
DHJJ offers tax, audit, assurance, and accounting services to organizations across many industries. If your company has an upcoming audit or assurance need, contact us at 630-420-1360 or contact us online so we can help you plan the process.
