Located in a section of the Internal Revenue Code is a description of a retirement savings plan called a 401(k), which was wonderfully created for the benefit of many employees. What it does is give employees the opportunity to defer part of their salary on a monthly basis into an investment savings fund. As an employee, you can transfer and invest this money before it is taxed, and it will stay untaxed until the money is withdrawn from the account. There are more benefits for this investment: your employer can match your contributions, and you are also given some investment options such as stocks, bonds, mutual funds, guaranteed insurance contracts and individual brokerage accounts with which you can invest with your retirement money. Another great feat: you can relocate this money among these options any time you want. It makes it for a very malleable way of making money.
Your employer basically would need to hire an independent accounting firm if the 401(k) reaches a certain limit of participants, because at this point, it is subject to government regulations. This is called a 401(k) audit, and is performed by a CPA firm, where they investigate some information regarding the retirement plan and see whether the plan is fair in representation and that is stable and secure for all the employees who are connected to the plan. It’s basically a means to make sure that your money is safe in the account.
Here’s what to know about 401(k) auditors: they tend to be certified public accountants, who work within the accounting firm (sometimes they run them). When they are performing their investigations, they use these question plans to ask themselves so they can keep an eye on what is important:
- What is the amount of value in the plan and is it fairly valued?
- Are contributions being made in a timely manner?
- Do all participants have fair chance and equality?
- Are the payments fair in value and following the guidelines described in the contract?
- Is there a possibility that there will be potential tax issues?
- Is there any record of ERISA-prohibited transactions being made?
401(k) auditors ask themselves these questions to make sure that the account they are looking into is secure. If a 401(k) reaches a minimum of 100 applicants, then it is required to perform an audit, since this is the legal minimum that requires an independent accounting firm to be hired to perform the audit. The auditors want to make sure that all communications are transparent and secure between employers and employees, and that all government regulations regarding the retirement plan are abided by in the plan.
An employer can actually hire an accounting firm to perform the 401(k) audit voluntarily, even if the 100+ participant limit hasn’t been reached. An employer who does this will ask for it out of deep concern and curiosity towards his or her policies and how they affect his or her employees..
When an employer is preparing for a 401(k) audit, there are many documents that are necessary in order to give them to the CPA firm and allow them to conduct the audit quickly and effortlessly. What is most needed would be the contract that is offered to the employees, IRS papers, amendments made to the plan, historical plan documentation, summaries of all the activity going on within the plan and others.
Some time is needed for the employer to be able to gather these documents together. Tax returns are generally filed with the IRS every year, so an employer will need to keep records of all that to make sure that everything is running smoothly. This is where the audit becomes mandatory, since if the plan is large enough, then the 401(k) audit is required along with the tax return form, which is called Form 5500. The IRS will let the employer know whether or not this form is necessary. A good employer should either have a bookkeeper to keep all company records and forms organized and to know where the company files are located. It is important therefore for the employer to choose the right accounting firm to work with in the future, since this will ensure better results for the employees’ sake.
Knowing more on your own end is better for you. You may want to request suggestions from your employer if you ever have questions or concerns about the legitimacy of a 401(k) audit. Hopefully, learning more about this auditing process will help you stay in a more secure job position.