News

As a retirement plan sponsor, ensuring your 401(k) or 403(b) plan remains compliant with regulatory requirements is crucial for smooth operation and for protecting your employees’ interests. One significant aspect of maintaining compliance is preparing for a mandatory annual audit, which becomes necessary once your plan reaches a specific number of participants. This guide will walk you through the key elements you need to know, including determining when an audit is required, preparing for the audit, selecting an audit firm, and crucial considerations for a successful audit process.

Determining When a Plan Needs an Audit

The requirement for a mandatory audit is not triggered by the value of the assets in your retirement plan but rather by the number of participants with account balances. According to the Employee Retirement Income Security Act (ERISA) and Internal Revenue Service (IRS) rules, the criteria for requiring an audit are as follows:

1. New Plans: If you are sponsoring a new retirement plan, an audit is mandatory if the plan has more than 100 participants with account balances at the end of the first plan year. It’s important to note that this count includes all eligible employees, whether or not they are actively contributing to the plan.

2. Existing Plans: For plans that are not in their first year, the threshold for requiring an audit changes slightly. An audit is required if the number of participants exceeds 120 at the beginning of the plan year. This slight increase in the threshold allows for some fluctuation in participant numbers without immediately triggering an audit requirement.

Understanding these thresholds is crucial for plan sponsors to stay compliant and avoid potential penalties. It’s important to regularly monitor your plan’s participant numbers and prepare accordingly as your plan grows.

Preparing for an Audit

Once your plan reaches the size that necessitates an audit, it’s time to begin the preparation process. Proper preparation not only ensures compliance but also facilitates a smoother and more efficient audit process. Here are the steps and documents you need to gather:

The following documents are typically required for the audit:

Selecting an Audit Firm

The selection of an audit firm for Large Plan Audits is a critical decision. According to the DOL, firms that perform only a few plan audits per year often deliver poor-quality audits, which can result in compliance issues and penalties. Therefore, it is essential to choose a firm with extensive experience in auditing large plans. Surprisingly, there is no direct correlation between the fees charged by an audit firm and the quality of the audit. It’s advisable to seek firms that specialize in retirement plan audits and have a proven track record of high-quality work. Don’t hesitate to shop around and compare different firms based on their experience, approach, and reputation.

Key Considerations for a Successful Audit

To ensure the audit process is smooth and efficient, it is crucial to start preparing well in advance. Here are some key considerations:

1. Start Early: Ideally, begin preparing for the audit a year before it is required. This includes gathering necessary documents, selecting an audit firm, and ensuring that all plan operations and records are in compliance.

2. Adhere to Deadlines: The audit and Form 5500 filing deadline is typically July 31st of the following year. If you need more time, extensions are available until October 15th. It’s important to be aware of these deadlines to avoid late filing penalties.

3. Submit Employee Census on Time: Ensure that your employee census is submitted by January 31st. This report is crucial for the audit as it provides detailed information about the plan participants, which the auditors will use to verify participant data and calculate contributions.

4. Stay Proactive: Regularly review your plan’s compliance status and participant data. Address any discrepancies or issues promptly to ensure they do not become significant problems during the audit.

5. Engage with Your Auditor: Establish a good working relationship with your auditor. Clear communication and cooperation can help identify and resolve potential issues early in the process.

Conclusion

Preparing for mandatory Large Plan Audits of your 401(k) or 403(b) plan is a crucial aspect of plan management and compliance. By understanding the requirements, preparing thoroughly, selecting a qualified audit firm, and adhering to key deadlines, you can ensure a smooth and successful audit process. Staying proactive and engaged throughout the year will help you maintain compliance and avoid potential penalties, ensuring that your retirement plan continues to serve the best interests of your participants.

See Other Posts From Hunter Benefits