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As the owner of your own business, you’re likely well aware of keeping good records and knowing where your money goes. But what about when it comes to your 401(k)? Even if you set up your 401(k) yourself, you should still review the information and make sure it’s correct at least once a year. This way, you can catch mistakes as they happen and keep them from costing you more in the long run.
Learn more with these frequently asked questions about 401(k) auditing and other tips to keep your retirement plan on track.
What is a 401(k)?
An external entity will perform a 401(k) audit, an annual review of your company’s plan. The Employee Retirement Income Security Act of 1974 (ERISA) requires these audits, a federal law that sets minimum standards for voluntary retirement and health plans. An audit will reveal any areas of the plan that are not compliant and help you take corrective actions, thus minimizing risks to your employees and your company.
Who Needs an Audit?
If a company has more than 1 eligible participant at the start of the plan year, it must conduct a 401(k) audit.
Some exceptions to this rule:
You can delay an audit if your total participants fluctuate between 80 and 120. You have not yet started a plan year that has 121 participants or more. This is the “80-120 participant rule.”
- You can wait until your plan reaches 100 participants to audit it.
- Audits will be required if your plan is significant and you have reached the 120 eligible participants threshold. Unless the eligible participant level drops below 100, you’ll still file your Form 5500. In this case, it will be considered a small plan.
WHEN?—When is the audit due?
It is due annually. According to the IRS, if your plan is subject to ERISA and you have 100 or more participants who had excess annual additions in their accounts, you must complete an audit within 12 months after that plan year.
WHERE?—Where is the audit performed?
The audit is performed by an independent third party that your employer has contracted to conduct reviews and audits on your 401(k) plan. If you are unsure who that person is, ask your employer or HR department, or use the check stub maker for ease and accuracy.
How Do You Prepare for an Audit?
The main thing you need to do for a 401(k) audit is to have all your records in order. If you don’t, it might mean more than just having an uncomfortable conversation with your auditor—it could trigger fees or penalties from your employer.
The best way to prepare for an audit is by finding (or making) a pay stub maker that can quickly bring together all of your paperwork and record-keeping into one place. Using a free paystub generator can make it easy to organize and view your paycheck details, including deductions, gross pay, taxes withheld, net pay, and other information on an ongoing basis. So you have everything you need in case you’re audited.
Related Article: 3 Reasons a PayStub Generator Changes the Game for the Self-employed?
FAQ's
What is an audit of a 401(k) plan?
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A 401(k) plan audit examines its financial records and operations to ensure that it complies with applicable laws and regulations, including those set by the Department of Labor and the IRS.
Who is responsible for auditing a 401(k) plan?
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The plan administrator is responsible for ensuring that the plan is audited annually by a qualified independent auditor. The auditor will typically review the plan's financial statements, internal controls, and compliance with applicable laws and regulations.
What are some common areas of concern in a 401(k) plan audit?
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Some common areas of concern in a 401(k) plan audit include the accuracy and completeness of plan contributions, proper documentation of loans and distributions, appropriate investment of plan assets, and compliance with plan document provisions and fiduciary responsibilities. An audit can help identify areas where the plan may be at risk of noncompliance and provide recommendations for remediation.
