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The Need for a 401k Audit

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401k audit Millions of people rely on retirement savings account to secure their futures. One of the most common types of these accounts in the United States is a 401k. The name comes from the section of the IRS code that describes the account. The account allows employees to defer some of their salary pre-tax into an investment savings account. Taxes on the money will not be paid until the money is withdrawn from the account. Many employers offer these accounts as a benefit, matching employee contributions up to a certain dollar amount.

The account’s funds will typically be invested in a wide variety of investment opportunities, selected by the accounting firm in charge of the accounts. Common types of investments made are stocks, bonds, guaranteed insurance contracts, and mutual funds. Usually money can be reallocated across the different investments at any time, so there is some flexibility in 401k accounts.

If a company has 401k plans of a certain size, they will have to be audited by an independent CPA firm. This is done to make sure that  company’s 401k accounts fall in line with all government regulations. Over the course of the 401k audit, the accounting firm in charge will review all financial data in the company’s plan. Once they’ve gathered all of the necessary information, the firm will offer their thoughts as to whether or not the 401k plan provided by the company is clearly presenting the essential aspects regarding the stability and overall status of the account. Each employ participate in a company’s 401k plan deserves to have all of the pertinent information, as people often rely on the accounts for retirement.

The main goal of any 401k audit is to ensure the company’s 401k plans comply with government regulations. At the same time, the firm reviewing the plan will review the plan details laid out in documents and make sure they are being followed correctly. Certified public accountants, CPAs for short, are generally tasked with carrying out these audits. There are many detailed financial questions that must be asked during the process, so they are most qualified to handle it. Let’s look at some of the basic questions asked during the review:

  1. Are assets in the plan valued appropriately?
  2. Is the plan equal opportunity (can all eligible employees participate?)
  3. Are accounts stated fairly and accurately?
  4. Are payments being made correctly, in accordance with plan terms?
  5. Have potential tax status issues been identified and dealt with?
  6. Have ERISA-prohibited transactions occurred?

These questions help ensure the integrity, safe, and stability of 401k retirement accounts. The audit is an opportunity to see where the plan can be improved and to make sure nobody’s money is at risk due to oversights or poor planning. A ‘large’ 401k classification will always trigger an audit. A 401k plan needs 100 participants to be denoted as large. That doesn’t mean smaller plans can’t have audits however. It’s always wise to make sure things are working as planned and without any issues.

A 401k audit can be a relatively big deal for large companies with many employees. The audit will generally be attached to a company’s financial filings, essentially creating a paper trail. Usually a company will name a plan administrator, and this person will receive a summary of the audit and other communications from the auditor. The CPA in charge of the audit should be open with communication, as they should be seeking to correct any uncovered noncompliance issues and strengthen the overall plan. The best CPAs will do their part in conveying the importance of the fiduciary duties that managing a 401k carries.

Though some 401k audits are mandatory, many companies and firms will find themselves with plans well under the size that triggers them. For these companies, it’s still wise to hire an accounting firm to audit their 401k plan. This will help a company plan ahead and get  ready for when the plan becomes large enough to trigger mandatory audits. Furthermore, plans that undergo audits are often more successful and beneficial to employees. The audit will require a lot of document gathering and preparation, so an appropriate time commitment is necessary. Of course one of the major benefits to an independent audit is that it can be handled in-house, by a company’s own accounting team.

A company’s 401k plan will have to be addressed during tax filing. Large plans, with 100 or more participants, will require an audit with filing. For this reason, it’s important that a competent, trusted accounting firm is tasked with carrying out the audit. For obvious reasons, the firm must be independent, and not associated with the company. The IRS wants to see that a plan is in compliance and fair to the participants. 401k audits are essential to health of the accounts in general.