EBP – Understanding the Filing Requirements

Does your organization’s 401k plan have 120 eligible participants? If so, an audit is required. After an initial audit, your 401k plan will need to be audited every year until you have less than 100 participants. 

So who is an eligible participant? Good question! Any active employee who meets the requirements of your organization and the IRS to participate in the plan, even if they have chosen not to. Terminated or resigned employees with 401k balances on the first day of the plan year are known as eligible participants as well.

What to Do If Your Organization is Due for An Audit

If your company meets the criteria for a 401k plan audit, be sure to complete and submit your financial statements and Form 5500 within seven months after the month your plan year ends. In the event you file an extension, you’ll have an additional two and a half months to take care of this. 

Lets say your 401k plan ends December 31s 2020, you’ll have until July 31st 2021 to take care of these financial statements. If you file an extension, your deadline would be pushed back to October 31st 2021.

The Purpose of a 401k Plan Audit

A 401k plan audit focuses on two major areas: compliance and financial reporting. During the audit, a thorough analysis of your organization’s documentation and compliance will be performed. 

This will ensure your plan is adhering to all plan guidelines as well as IRS and Department of Labor (DOL) regulations. In addition, all of your plan’s financial statements, Form 5500, and any disclosures you may have will be carefully reviewed for accuracy.

How to Prepare for an Audit

Fortunately, there are a number of things you can do to increase your chances of a successful 401k plan audit. Here are some tips. 

Gather Relevant Documents

Collect any documents related to your plan and make sure they are all up-to-date and well organized. These documents may include your current year census, a copy of your previous Form 5500, financial statements from the plan sponsor, discrimination tests, and W2s and other payroll registers. This will take a great deal of stress off you during the audit and free up your time and energy for any new requests the auditors may have. 

Check Compliance

When you originally set up your 401k plan, you received a document that outlined the enrollment procedures, eligibility guidelines, and rules related to the plan. Take the time to closely review this document to make sure you’re running your plan correctly.

Find out if non-eligible employees are participating or eligible employees are being turned away. Also, compare the plan’s definition of participant compensation to your payroll records. You may also want to check the plan’s participant loan restrictions to see if any outstanding loans are non-compliant. 

Review IRS Checklist

The IRS put together a handy checklist that can help you prepare for your audit. In the checklist, you’ll find questions such as “Are the plan’s operations based on the terms of the plan document” and “Has your plan’s document been updated within the past few years?” Go through the checklist honestly and use the “Fix It Guide” to correct any mistakes.

There’s no denying that a 401k audit can be nerve racking, especially if you’ve never experienced one before. The good news is that with a bit of knowledge and preparation, you can increase its chances of success and prevent issues down the road.

Still have questions or wondering what the next steps is if your plan requires an audit?  Not a problem. Contact Jerad Daley for further help.