Mistakes That Trigger a 401k Audit Being subject to an IRS audit can be an unnerving experience, so itโs understandable that organizations would want to prevent one. Benefit plan administrators should do what they can to avoid 401(k) audit mistakes and ensure that their plans are in compliance. Certain benefit plans, such as 401(k) plans are subject to regulations mandated by the U.S. Department of Labor and the IRS. For the protection of investors, these agencies regulate benefit plans to make sure that they are appropriately managed and that funds are invested properly and in a timely matter. Total Eligible Plan Participants Your organization may be required to have an audit by a third-party CPA firm if you have 100 or more total eligible plan participants. However, eligible plan participants may include individuals no longer on your payroll or deceased individuals. A qualified auditor can help you to determine your total eligible plan participants, if you are required to conduct an audit, and file Form 5500-SF or Schedule H of Form 5500. 401(k) Mistakes to Avoid Whether or not your 401(k) plan has been reviewed by a CPA firm, there are certain 401(k) mistakes that could capture the attention of the Department of Labor, leading to an IRS audit.
- Enrollment snafus, like employees signing up to early or too late for your plan, or not at all, can signal a problem. This can happen when employees are working in multiple locations or divisions.
- When an employee experiences a break in service, rules should be in place for when they can re-enroll in the plan. When this rule is overlooked, it could be an indicator to the government that something is wrong.
- Employee contribution amounts should be determined by plan documents and employee instructions. A difference may receive notice.
- The DOL requires that contributions must be paid as soon as it is feasible to do so, and no later than the 15th business day of the following month, whenever deferrals are withheld. Not doing so could be a red flag.
- After an employee leaves, and forfeits their account, funds should be used, as outlined in the plan, and in the time frame required by the IRS.
- Whenever an employee accepts a distribution from their account, it must be taxed according to IRS rules. Failure to deduct the correct taxes is a definite tip-off to the IRS that something is not right.
