Usually, a 401(k) audit is something that employers have to worry about when it’s that time of year to have their retirement account activity be monitored by third party accounting firms. It’s a process that is supposed to ensure employees that their money is being taken care of and that their employers are treating them fairly. Whether you are an employer looking to offer his or her employees the chance to a 401(k) or whether you are an employee looking to find out more information to see if the company you are working for is following certain secure procedures with your retirement account, this essay will highlight the definitions of what a 401(k) plan is, what a 401(k) audit is, who is the auditor, what they are looking for during the audit process and more.
First off, the 401(k) retirement savings program. It is a program that literally takes investments that you have made from your paycheck into a pension. The neat thing about this plan, according to the 401(k) section of the Internal Revenue Code of federal statutory tax law (see where the name came from?) is that investments being made towards the pension will not be taxed until the money is withdrawn from the account. It is a deferment. Essentially, investors or otherwise known as eligible employees that are part of the plan don’t have to worry about using the money to pay taxes until they are ready.
Investments don’t have to be towards just the retirement plan, either. If it fits to the company’s individual agreements made between employees, they can use those payments in other investments like bonds, mutual funds, brokerage accounts, stocks – you name it. The money should also be easily transferable and disbursed for these purposes.
Essentially, a 401(k) audit is used to check into how a company is doing when it comes to handling these 401(k) accounts. These audits are kept in records together with the company filings to the IRS, so everything is recorded. A company is not required to go through a 401(k) audit if it has less than 100 eligible participants (its own employees), but an employer can choose to hire an independent accounting firm to undergo an audit process if he or she chooses to do so. When it is mandatory to have a 401(k) audit (meaning when the retirement program exceeds 100 participants), a third party accounting firm has to be hired anyway to perform the audit.
Auditors normally are Certified Public Accountants, but this is dependent on how excellent and reputable the CPA accounting firm hired to do the job is. Well reputed accounting firms are communicative and are concerned with the best for the employees making the investments. What they ask for from the company are IRS documents, the 401(k) contracts (both past and current) and many more (usually summaries of modifications and such). These are usually held in company records, so a company is thus organized if there is a plan administrator or a bookkeeper hired to keep these records in place and secure. What a good financial 401(k) auditor does in return is give advice on how the investments can be improved based on his or her professional opinion, as well as make sure that everything being done is in accordance to government procedures and regulations. A good auditor asks himself or herself certain questions when it comes to going through the audit process. Some of these questions are as such:
– Do all employees have equal chance to the 401(k)? No single employee should be denied this opportunity when others are being offered the same chance.
– Is every transaction going through the plan prohibited by the Employee Retirement Income Security Act (ERISA)? No such transactions should be taking place.
– Do the plans carry enough value? Are they proper investments that will provide for a better future for the employees?
– Are the payments timely? They should be consistent and regular in payment value.
– There should be no tax issues or problems. Are there any potential ones that many come up in the future?
– Is the plan that is written on the paper contract being executively followed? Promises and procedure plans made by the contract should be upkept.
These are only some of the questions being asked for this process. A great employer will be able to provide all of these requirements without having the accounting firm to fix any noncompliances. A great accounting firm will take action to ensure that necessary actions will be taken.