EMPLOYEE BENEFIT PLANS
Do You Need A 401(k) Audit?
Kimberly A. Reed
Principal, CPA
31 May 2018
Determining if you need an audit of your 401(k) plan can be very confusing. This is especially true if it is the first year you may require an audit. Generally, plans with fewer than 100 participants at the beginning of the plan year are eligible for an audit waiver if they meet certain conditions. It is important to note that participants are considered to be any individuals who are actively employed and covered by the plan who earn or retain credited service under the plan. This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan. This does not include (a) non-vested former employees who have incurred the break in service period specified in the plan or (b) former employees who have received a “cash-out” distribution or deemed distribution of their entire nonforfeitable accrued benefit.

The other conditions that must be met in order to claim an audit waiver, including the filing of a schedule I in the form 5500, are: 1) As of the last day of the preceding plan year at least 95{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of a small pension plan’s assets must be “qualifying plan assets” or, if less than 95{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} are qualifying plan assets, then any person who handles assets of a plan that do not constitute “qualifying plan assets” must be bonded in an amount that is at least equal to the value of the “non-qualifying plan assets” he or she handles. Qualifying plan assets are any asset held by certain regulated financial institutions, shares issued by an investment company registered under the Investment Company Act of 1940 (e.g. mutual fund shares); Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution describing the plan assets held or issued by the institution and the amount of such assets; and Qualifying employer securities, as defined in ERISA section 407(d)(5); and participant loans meeting the requirements of ERISA section 408(b)(1), whether or not they have been deemed distributed.  2) The plan administrator must include certain additional information in the Summary Annual Report (SAR) furnished to participants and beneficiaries. This information includes the name of each regulated financial institution holding or issuing “qualifying plan assets” and the amount of such assets reported by the institution as of the end of the plan year; the name(s) of the surety company issuing enhanced fidelity bonding, if the plan has more than five percent of its assets in “non-qualifying plan assets” a notice indicating that participants and beneficiaries may, upon request and without charge, examine or receive from the plan copies of evidence of the required bond and copies of statements from the regulated financial institutions describing the “qualifying plan assets;” and a disclosure stating that participants and beneficiaries should contact the Department of Labor’s Employee Benefits Security Administration (EBSA) Regional Office if they are unable to examine or obtain copies of the regulated financial institution statements or evidence of the required bond. These enhanced SAR disclosures are not required for certain qualifying plan assets including qualifying employer securities, as defined in ERISA section 407(d)(5), participant loans meeting the requirements of ERISA section 408(b)(1) and in the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control provided the participant or beneficiary is furnished, at least annually, a statement from an eligible regulated financial institution describing the assets held or issued by the institution and the amount of such assets. 3) In response to a request from any participant or beneficiary, the plan administrator must furnish, without charge, copies of statements that the plan receives from the regulated financial institutions holding or issuing the plan’s “qualifying plan assets” and evidence of any required fidelity bond.

There is one additional rule that allows plans to avoid the audit requirement known as the 80- 120 Participant Rule. Under this rule, if the plan meets the conditions of the “80-120 Participant Rule,” it may file as a small plan and attach Schedule I instead of Schedule H to its Form 5500, thus avoiding an audit. According to the 80-120 Participant Rule, if the number of participants covered under the plan as of the beginning of the plan year is between 80 and 120, and a small plan annual report was filed for the prior year, the plan administrator may elect to continue to file as a small plan.  Based on this rule, once the number of participants at the beginning of a plan year exceeds 120, the plan will be considered a large plan and would require an audit. The plan will continue to require an audit until the number of participants at the beginning of the year drops to 99.

Ensuring your plan has an audit is part of the plan sponsor’s fiduciary responsibility. Failure to have an audit when required can have serious and costly consequences to the plan sponsor.  You need to make sure you understand when your plan needs an audit and see to it that you have a qualified accounting firm perform this audit.

 

For each subsequent year after your required beginning date, you must withdraw your RMD by December 31. The first year following the year you reach age 70½, you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½) and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both amounts included in your income for the same year, you can make your first withdrawal by
December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.

Example: John reached age 70½ on August 20, 2013. He must receive his 2013 required minimum distribution by April 1, 2014, based on his 2012 year-end balance. John must receive his 2014 required minimum distribution by December 31, 2014, based on his 2013 year-end balance.

If John receives his initial required minimum distribution for 2013 on April 1, 2014, then both his 2013 and 2014 distributions will be included in his income on his 2014 income tax return.

If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} excise tax on the amount not distributed. It is important to make sure you understand these rules and take your RMD when it is required. You have worked hard to save for retirement and now it is time to start enjoying it.

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