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As an employer, it is mandatory to have a 401(k) plan for employees, as per the IRS and Department of Labour. A 401(k) plan accounts towards the unemployment and retirement benefits for any working professional.
Usually, when the company size is not greater than 100, neither IRS nor DoL takes much interest in the plan. However, as soon as the company size increases to 120 or above, the IRS will conduct an annual 401(k) audit.
Notably, the audit would continue until the company size falls below 100.
To know what these audits are and more, keep reading.
What is a 401(k) Audit?
In simple terms, an inspection to verify if all the details shared in the 401(k) plan are correct, a 401(k) audit is needed.
An independent public accountant or an audit officer would prepare a report about your company’s 401(k) plan. However, it is usually ordered by the IRS.
On the complete review of a company’s 401(k) plan, the shortcomings are identified. Following upon which the corrective measures are implemented.
As you would already be aware of filing taxes for the 401(k) plan, you must know that you will not necessarily always require an audit. Only when the total number of eligible participants increases above 120 on the first day of the plan.
It means, that regardless of your company size throughout the year, the IRS will only notice the headcount on the first day of the plan.
What does it involve?
By now, you must already have an idea about how lengthy and cumbersome the audit could be. And to your surprise, the auditing officer may ask for records from as back as 6 years.
In general, the complete audit takes about 6-8 weeks until the final report is prepared. The report is then attached along with the form 5500 and shared with the IRS.
The complete auditing process involves several steps. To begin with, the auditors may ask for plan details from as back as 6 years, as already mentioned.
If they are still uncertain about the facts and details, they may ask for a detailed review. It would also include interviewing the participants, i.e. your employees.
It might not be workable for you to handle all the plan-related information on your own. However, a compliant accountant, as mentioned on https://templetonco.com/industries/employee-benefit-plan-401k-audits, can help you with all the nitty and gritty of the filing process. And thereby, save you from a tedious auditing process.
What do you do when faced with an audit?
As already mentioned, the IRS would only order for an audit if they have a valid reason for it.
Nonetheless, if you anyhow have to face an employee benefits plan audit, then you ought to know the right way ahead. For, you wouldn’t want to pay compensation for something that you didn’t know.
Contact your Accountant
The very first step that you should be doing is responding back to the IRS. Failing to respond may invite strict audits down the line.
Apart from sending back your response, you should also consult with your accountant. The professionals ought to know the charges that you may face, and accordingly would guide you out of the troubles.
Besides, your accountant can also help you with the initial info review stage. They can prepare the preliminary report and duly fill the Form 5500 on your behalf. They may also negotiate on your behalf with the auditing officers if need be.
Check out the Records
You would also need to dig records to produce to the auditing officers when needed.
It is noteworthy that you only need to dig the records for the specified year(s). Unless the auditing officers ask for more information.
In addition to finding out the complete records, it would be an added advantage if you can go through the records yourself. Seek help from your accountant to understand what’s in the record and why it is there.
The audit officers, as already mentioned, can ask for personal interviews with you and your employees. And if you already knew about your records, you can easily answer the questions they throw at you.
To sum it up, a 401(k) audit is not something that you should fear. All you need to do is choose the right plan and pay the taxes at the right time. And you can rest assured that you won’t end up paying penalties to the IRS.
You may also like: Building a Retirement Nest Egg? Here are 8 Things You Should Know about IRAs
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