If your company’s 401k plan has 120 eligible participants on the first day of the plan year, an audit is required. Once an audit has occurred, the 401k plan must be audited annually until the eligible participant 401k participants drop below 100 eligible participants. An eligible participant is anyone who is an employee of the company who meets both the statutory IRS requirements and the requirements of the company’s 401k plan agreement at the beginning of the year. Even if employees decide not to participate in the plan, these employees are still considered eligible participants. Terminated employees who have balances in the 401k plan on the first day of the plan year must also be included.
If a 401k plan audit is required, a company’s financial statements will need to be completed and submitted with IRS Form 5500, within seven months after the end of the month the plan year ends. If an extension is filed, Form 5500’s due date can be extended an additional two and a half months and allows the financial statement due date to be extended as well
The first things we will review as part of a 401k plan audit are the company’s documentation and compliance. An analysis will be conducted to make sure the plan is operating within the guidelines of the plan-related documents. The plan will also be reviewed to ensure it follows specific Department of Labor and IRS regulations. After this, the plan’s financial statements, any disclosures, and Form 5500 will be reviewed to make sure the financial information is reported correctly.
These occur when the plan document is not created in accordance with government regulations. This failure can be the result of an unintentional error that stemmed from the way the document was originally written. It can also occur when amendments are made to the plan in response to a regulatory or statutory change but were not completed in a timely manner.
When a plan document failure is discovered in a 401k plan audit, it’s usually required that the plan documents be modified and that a correction be issued to plan participants. This will only be completed if the correction will be favorable to the plan participant.
Some common operational errors include failure to admit participants into the plan when they become eligible, incorrect contribution amounts made to the participant’s accounts, and incorrect vesting percentages being used when distributions are made.
If an error is discovered during a 401k plan audit, the error needs to be corrected within the plan and with the Department of Labor and IRS. The most common errors can be corrected through the IRS’ employee plans appliance resolution system.
Even if your company has a small plan, there are less than 100 participants, and a 401k plan audit isn’t required, it’s still very important that your plan is operating in strict accordance with the guidelines of the plan-related documents and that the plan is in compliance with certain Department of Labor and IRS regulations.