People are constantly concerned with retirement. Nobody wants to work forever, and they don’t want to worry about how they’ll survive when they reach retirement age. 401k accounts are one of the measures in place to make sure people have enough to retire. A 401k is simply a retirement savings account that allows individuals to contribute pre-tax earnings that are to be invested, grow, and released at retirement age, designated at 59.5 as of now. The money isn’t always tax-free however, as income tax is paid when the money is withdrawn from the account. As long it’s taken out after retirement age however, there will be penalties. Many companies in the United States offer 401k accounts as a benefits, and will match a certain percentage of your pre-tax contributions. This can be a huge help for retirement and generally seen as a great benefit. It should be noted that there IS a maximum yearly pre-tax contribution.
A 401k seeks to grow an individual’s investment by distributing funds over a variety of different investments. Stocks, bonds, and mutual funds are some of the more common ways 401k funds are invested. These are just a few examples however, as there are quite a few choices when it comes to investments. Typically the path of investments is decided by the plan administrator, usually an experienced accounting firm or accountant. Companies may have in-house accountants handling this, or they may outsource, it just depends on the size, type, and preference of the company.
Many 401k plans are required to undergo a yearly audit. These audits become mandatory for plans that have 100 or more eligible participants. A company must select an independent and unassociated firm to carry out the 401k audit. The reason for this should be obvious, as a company cannot audit itself without bias. There are many things the auditing CPA firm is seeking to uncover and understand. First of all, the CPA will determine whether or not the most important features of the plan are clearly presented to participants. Additionally, they seek to find out if the plan’s current stability is accurately and clearly portrayed by the plan manager. These are very important facts, but they are far from the only reason for the audit.
As with any investment account, 401k accounts have many rules and regulations regarding them. In fact, the very name of the accounts stems from the IRS code that applies to them. The 401k audit’s primary goal is to make sure that the 401k plan follows regulations and guidelines closely. Of course a plan MUST follow government regulation, but it also needs to follow the guidelines laid out in the plan’s executed documents that participants have agreed to and signed off on. For these reasons audits needs to be precise, and should be handled to expert CPA firms.
During the course of the audit, top CPA firms will seek to answer several questions that will illustrate the overall health of the 401k plan. Here are a few examples of questions accounting firms will seek to answer:
- Have assets been assigned the appropriate value?
- Is the plan open, available, and accessible to all eligible employees?
- Are payments being applied correctly to individual accounts?
- Have there been any tax issues and have been properly addressed?
- Have any ERISA-prohibited transactions taken place?
This is quick example of some of the questions that will be asked and answered by the best accounting advisors. Employees rely on 401k plans to retire in timely fashion, after they’ve dedicate their lives to a company’s success. Therefore, they should be able to rest easily knowing their money is being appropriately cared for and managed. This is the exact purpose 401k audits serve. They help the IRS make sure that everybody is getting the plan they deserve. These audits can also have other benefits though. They show companies how plans need to be adjusted or tweaked to maximize gains and contributions. Though audits are mandatory for ‘Large’ 401k plans with more than 100 participants, many companies with smaller plans still have audits.
Due to their benefits, 401k audits are often used by companies with plans that have less than 100 participants. But they do take some prep work, and the plan administrator will have to gather quite a few pertinent documents. They’ll include IRS documentation, including determination, executed plan documents along with amendments, and all summary plan descriptions. These are only a small piece of what will likely be needed however, and an accountant will be able to go into further detail. The easier these documents are located the smoother the audit will be.
Of course the reason for mandatory audits is an IRS requirement, so it follows that the audit will have to be submitted along with taxes. 401ks and these audits are serious business, the IRS wants to be sure that a company is in compliance and following the law. Companies need to have experienced, talented accountants auditing their 401k plans. It can cause real issues if an audit has missed a glaring issue.
It doesn’t matter if a 401k plan is defined as ‘Large’ and requires an audit, or is small and doesn’t, audits are a good idea. Plans that are growing will be ready for a smooth transition if and when audits do become mandatory, and audits will let companies know what they’re doing right with their plans, and what they could do better.