When is a 401k Audit Required in California?

Handling the 401(k) administration for several workers can be a heavy burden, especially when it is time to conduct a 401(k) audit. However, it is important that this process is done carefully and correctly to avoid an unwanted external audit. Companies that possess a well-organized 401(k) auditing system are more likely to attract valuable employees to their business. If your business needs assistance performing a 401(k) audit, you should consult with an experienced Roseville and Sacramento 401(k) auditor today. At Cook CPA Group, our business accountants would be proud to help you conduct a 401(k) audit for your business. Our firm is here to explain when a 401(k) audit is required in California.

What is a 401k Audit?

A 401(k) audit is an inspection of an employee benefit plan’s financial status. A certified public accountant typically performs this inspection. The goal of a 401(k) audit is to ensure that the proper steps were taken when the 401(k) plan was established, and employees were enrolled. For example, if an employee was enrolled in a plan too early or mistakenly not enrolled at all, this can cause serious issues.

The Employee Retirement Income Security Act established the rules for 401(k) plan audits. The enforcement of 401(k) plan audits are conducted by the Internal Revenue Service (IRS) and the Department of Labor (DoL), and 401(k) plans must comply with the rules set by these agencies. A Form 5500 and 401(k) financial statement is what the IRS and DoL inspect to ensure a company’s benefit plan is being operated correctly

To learn more about why 401(k) audits are conducted, you should seek an experienced California auditing service.

When Do You Have to Perform a 401(k) Audit in CA?

In California, an annual 401(k) audit is necessary when a business has an employee benefit plan that is considered a “large plan.” A large plan is an employee benefit plan that services 100 or more eligible employees. A 401(k) plan that is classified as a large plan should be audited by annually by an accounting firm that is not affiliated with the business.

Under certain circumstances, it may be possible to avoid undergoing a 401(k) audit. The 80-120 audit rule allows to avoid 401k audit if both of the following statements are true about your business:

• Your 401(k) plan was classified as a “small plan” in the previous year, meaning you had less than 100 employees last year but more than 80 employees
• Your business currently has at least 101 participants in its 401(k) plan, but no more than 120 participants total in this year

You should also know how to determine the number of employees that are participating in a 401(k) plan. This will help you avoid a scenario where you believed that you were eligible to avoid having an audit of your plan. To determine whether an employee should be counted as a participant in a 401(k) plan, you should count the number of participants starting from the first day of the plan year. If you are unsure when the plan year for your company begins, an experienced CPA may be able to assist you.

The due date for a large plan audit is typically seven months after the end of the plan year. This is when your Form 5500 and financial statement should be submitted to the IRS and DoL. However, there is a possibility that you can receive an extension on your 401(k) audit deadline. You should speak with an auditing service if you are concerned about meeting the deadline, you may be able to request a two-month extension. If you do not file your audit statement on time, the IRS can fine you $25 a day until you reach the maximum penalty of $15,000. The DoL has no maximum penalty and will fine you $1,100 a day for every day the audit is late.

The auditing process in California can be extremely complex. However, our firm would be proud to help you perform an audit to avoid severe penalties imposed by the IRS and DoL.

Our Employee Benefit Plan Auditors are Ready to Work with You

If you are unsure of whether you need to perform a 401(k) audit for your company, you should contact an experienced Roseville accounting firm immediately. The committed accountants at Cook CPA Group possess several years of accounting experience that will be utilized for the benefit of your company. We understand how complex a 401(k) audit can become and we are here to help you streamline the process. To schedule a free initial consultation to discuss an audit of your employee benefit plan, call Cook CPA Group at (916) 432-2218, or contact us online.