If you are an employer who offers a company 401(k) program for your employees, then it’s vital to know about 401(k) audits. First off, it’s important to understand what a 401(k) program is. It is a pension plan, or in other words, a retirement savings plan in which you allow your employees to make payments from their pay straight into their retirement savings prior to being taxed. Taxes will not be placed on these accounts until the money is withdrawn from them. The name “401(k)” comes from the section of the Internal Revenue Code that it comes from, which is found in any record of U.S. federal statutory tax law.
You can even give your employees the choice to use their savings in other investments, such as individual brokerage accounts, stocks, bonds and mutual funds. Money can be redistributed across these investments at any time. Details of the plan are also decided by you, the employer.
Once your 401(k) is in action, usually an audit is necessary to ensure its operations are fair and just, and that the investments being made are secure and safe. An accounting firm is normally hired to do the auditing. One thing to consider is that you are not obliged to have a 401(k) audit if you do not exceed more than 100 eligible participants (your own employees) to sign up for the program. If you do exceed more than 100 participants, you will need to hire an independent accounting firm to do the auditing, as this complies with government regulations.
Your 401(k) plan must abide by SEC and federal regulations, and it must comply with the agreements written in the contract itself. Most auditors are Certified Public Accountants (and if your current auditor is not, then it’s a useful tactic to consider getting a certified one). The CPA will be analyzing your 401(k) plan by using their own rubric in order to develop their own professional opinion about how your plan is working, thus offering methods of either fixing your plan in order to comply with federal regulations or offering advice to improve your plan and make it more efficient for your employees. All financial accounts need to be stable and safe.
Some of the questions an auditor will ask himself are as follows:
Do all employees have a fair and equal chance to participate in the plan?
Does the plan have proper and fair value?
Are the employees making consistent and timely payments?
Are these payments complying with the agreements on the plan?
Are there any tax issues?
Are there transactions being made that are prohibited by ERISA (Employee Retirement Income Security Act)?
Hopefully, you will have hired either a plan administrator or a bookkeeping so that you can be prepared for the 401(k) audit when the time comes around. Documents that are necessary for the audit include IRS documents, current and historical summaries of your 401(k) plan, the contract itself, summaries of modifications and more. Anything related to the 401(k) is necessary for the audit, and as long as you know where these company records are being kept, then the process will be much easier. The 401(k) auditor can then do his job by ensuring your plan is meeting government regulations, that every payment is accounted for and responsibly secure, and that the direction of your employees’ investments is heading toward a positive future.
It’s important that your audits are done well enough, as these are included with your company’s financial filings with the Internal Revenue Service. A good 401(k) auditor will communicate effectively about your plan, whether you need to correct anything that does not adhere to government regulations, how to improve the investments being made toward the plan, strengthen internal communication and just to remind you and your plan administrators how to uphold the responsibilities that are associated with your 401(k) plan.
The 401(k) plan is a means to ensure to your employees that they have a future they can feel secure of. With their trust in you and your company, it can certainly boost company esteem, it can boost their own self-esteem, and it can create a better, more trustful work environment for all involved. In essence, you will be doing a good thing for them, and this benefits you in the long run as you will then be building a company with values that employees can vouch for and work efficiently for.