Here at 401GO, our goal is to provide small-business owners with a safe, easy and affordable way to offer their employees the opportunity to invest in their futures through participation in a 401(k) plan. This service is invaluable to our clients, who are rendered better able to recruit and retain quality employees by offering them more valuable benefits, as well as to the millions of workers across the U.S. employed by small businesses who would otherwise have no way of investing as a means to fund their retirements. For some companies, a 401(k) audit is part of being a plan provider. How do you know if your business is required to perform annual 401(k) audits?
401(k) Audit Requirements
The main requirement laid out by ERISA (the Employee Retirement Security Act of 1974) that determines whether your small business needs a 401(k) audit is how many employees you have who are eligible to participate in your plan.
According to the Small Business Administration, a company must have fewer than 500 employees to qualify as a small business. You may not realize it, but 99.9% of all businesses in the U.S. — 33.2 million — are small businesses. Amazon and Walmart and Apple may get a lot of press, but they and others like them make up a tiny fraction of the total number of businesses.
Of the approximate 157 million workers in the U.S., just a little under half work for small businesses. That’s about 78 million people who may not have access to a 401(k) without the type of service that 401GO provides.
At what point will the number of employees eligible to participate in your plan trigger the need for an audit? Your small business only needs to be concerned about scheduling 401(k) audits if it has 100 or more employees eligible to participate — 120 if you have not previously qualified for an audit.
When calculating this number, it’s critical for every small business owner to understand that it is not 100 plan participants, but 100 employees eligible to participate. If you have 70 plan participants and 30 others who are eligible to join but opt out, you must still conduct the audit. In calculating this number, you may even need to include recently retired employees and employees who were terminated at a certain point in the calendar year.
Generally speaking, for an employee to be eligible to participate in the plan, they must be 21 years old and have completed a minimum number of days in service at your company.
While many companies add employees into their 401(k) plan on the first of the year, this may be done at other times during the year as well. To calculate your numbers correctly when determining whether your company needs an audit, you must count only employees who are eligible to join the plan on the first of the year. This may be an important distinction for you company to make.
What Is Involved in a 401(k) Audit?
Outside of the business world, audits are often associated with taxes and are generally considered unpleasant and stressful. But at many companies, audits are necessary to keep businesses on track. Many businesses perform audits of their own volition as a means to ensure their company is running the way they want it to. It helps not only to gain assurance that proper processes are in place and rules are being followed, but also to discover certain kinds of problems before they get out of control, such as fraud, embezzlement, mismanagement or other crimes involving assets.
When considering who should perform your audit, it’s important to remember that all 401(k) audits must be completed by an independent third party that has no ties to your firm — a certified public accountant or otherwise qualified auditor who is well-versed in laws pertaining to ERISA, the IRS, the Department of Labor and other applicable areas.
When participation at your company’s 401(k) plan reaches a point at which an audit is required, you must complete it within seven months of the end of the plan’s calendar year. If you are having trouble completing the audit in the time allowed, you may apply for an extension. The maximum time allowed for an extension is two and a half months.
Roughly speaking, however, the auditor you choose should be able to complete the audit in a few months or less, depending on the size of your company and the scope of the project. This time period can be greatly influenced by the diligence and strength of your recordkeeping and your ability to quickly and fully produce the documents needed to perform the audit.
Your auditor will, among other things, check to ensure your company is in compliance with laws pertaining to administration and management of a 401(k) plan, such as proper payments of distributions and rollovers and timely processing of employee contributions. Additionally, your auditor will check to ensure that your financial reports are in order and have been filed correctly and on time.
If any errors are discovered during the audit, your company then has a chance to correct them before serious consequences result.
Keep Your Company’s Plan Running Smoothly
While a 401(k) audit takes time and costs money, it is a necessary part of owning and operating a small business that provides benefits such as a vehicle for investing in retirement. If you aren’t sure whether your company is required to perform a 401(k) audit this year, consult a professional accountant. Failing to perform a required audit can result in fines or penalties for your company.
Here at 401GO, we understand how important it is for small-business owners and their employees to have access to a 401(k) plan that works for them. For help getting your small business started with a 401(k) plan or to learn more, contact us today.