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5 Signs You May Need a 401(k) Audit

Explore 5 signs your small business may need a 401(k) Audit in California. Roseville CPAs explain why it's important for small business owners in California to conduct regular 401(k) plan audits. If you're an employer who offers a retirement plan for your employees, auditing can ensure that your 401(k) plan complies with federal laws, helping you avoid costly penalties.

If you wish to avoid costly penalties that can slow down your business and hurt your bottom line, it is critical to ensure that your company satisfactorily meets all 401(k) plan requirements, which are established by the Internal Revenue Code (IRC) and federal laws such as the Employee Retirement Income Security Act (ERISA). A 401(k) audit can help to identify problem areas and ensure that you are complying properly. If you are a small business owner in the Sacramento area who needs assistance conducting a 401(k) audit, contact Cook CPA Group about our 401(k) audit services for businesses in Roseville and Sacramento.

Why Your Small Business Needs a 401(k) Audit

You might see the term 401(k) written as “401 k” or “401k.” Spelling differences aside, each term describes the same idea: an employer-sponsored retirement savings plan for employees. There are several different types of 401(k) plans, including:

  • Safe Harbor 401(k) Plans
  • SIMPLE 401(k) Plans (Savings Investment Match Plan for Employees)
  • Traditional 401(k) Plans

For a business owner in California, these plans can be a double-edged sword. On one hand, providing 401(k) benefits for employees can help you draw talented, innovative minds to your company – but on the other, failure to comply with the complex and rigid regulations governing 401(k) plans can cause your company to incur substantial fines.

Performing regular audits of your small business’ 401(k) plan can help you catch and correct any errors that may need addressing, which has two major benefits: first, auditing may prevent your business from being heavily penalized by the Internal Revenue Service (IRS). Moreover, conducting an audit can help to ensure that your 401(k) plan is as cost-efficient as possible, while identifying any potential obstacles or vulnerabilities that could hinder the plan in the near or distant future.

Beyond these financial benefits, there’s another, even more important reason to perform an audit of your 401(k) plan: for many employers, 401(k) audits are actually required by the Department of Labor (DOL). Whether an audit is required depends on the number of participants, which in turn determines whether the plan is considered “large.” Our Roseville audit accountants can help you understand whether a 401(k) audit is mandatory for your small business, and if so, assist you with all aspects of the audit process.

5 Signs Your Company’s 401(k) Plan Needs an Audit

Now that you understand what 401(k) plans are, and the benefits that meticulous and thorough 401(k) audits can provide, the next step is identifying potential signs that your company 401(k) plan needs an audit. A few of these signs are listed below.

  1. Your plan has at least 100 eligible participants. This qualifies the plan as a “large” plan, as we mentioned just a few moments ago. With a few exceptions, large plans must be audited by an external accounting firm, such as Cook CPA Group. If this applies to your business, you will be required to file Form 5500 (Annual Return/Report of Employee Benefit Plan), which is used by the DOL and IRS, and attach Schedule H (Financial Information).
  2. You aren’t certain the plan is as cost-efficient as it could be. Even if your 401(k) plan is not violating any laws, there could still be room for financial improvement. For example, are there any tax considerations that could cause short-term or long-term complications?
  3. It’s been a few years since you altered or updated the plan. If so, you should amend your plan to comply with any missed updates to the law.
  4. The plan doesn’t pass 401(k) ADP and ACP nondiscrimination tests. As a plan sponsor, it’s your responsibility to ensure that contributions for nonhighly compensated employees (NHCE) are proportionate with contributions for highly compensated employees (HCE), such as business managers.
  5. You’re planning on making major changes to the business. If you plan to add more employees, expand to other states or countries, or make other significant changes to your business model or operational strategy, it’s prudent to review your existing 401(k) plan and analyze how it might be affected.

Keep in mind that these are just a few of the many reasons your small business may need a 401(k) audit. There are numerous factors for business owners to keep in mind when considering or planning for an audit, including elective deferrals, top-heavy minimum contributions, participant loans, hardship distributions, and filing deadlines.

Roseville Business Accountants Can Audit Your Company’s Retirement Plan

Regular auditing is imperative for an employer who wishes to keep his or her small business in optimal financial condition. Unfortunately, it can be exceedingly difficult for a busy employer to navigate the complicated laws and regulations surrounding 401(k) plans for employees. The skilled and experienced Roseville business accountants of Cook CPA Group can help you navigate the rules with precision and care, protecting your company from avoidable financial harm. To arrange a free consultation, contact Cook CPA Group online, or call our Sacramento CPA firm at (916) 432-2218 today.