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Getting your plan ready for an audit – part 1 of 3

It’s time to start thinking ‘audit’ for your 401(k) plan. Asking yourself a list of questions will help you prepare and can even save you money in audit fees. Answering these questions provided by the IRS and taking action can reduce the amount of time it takes for an auditor to complete a review. Here you go –

1)      Has your plan document been updated within the past few years?

At the minimum, you need to keep your plan updated to reflect current law changes. In addition, the following documents need to be kept with the plan: 

  • Original plan document which provides in-depth details of how the plan must operate.
  • All subsequent amendments or restatements to the plan document.
  • All adoption agreements provided by a vendor that allows you to choose plan design options. While not the complete plan document, the adoption agreement includes eligibility requirements, the types and amounts of contributions allowed, the allocation method for employer contributions, the vesting schedule applicable to employer contributions and the distribution options.
  • Any opinion letter or advisory letter issued by the IRS.
  • Any determination letter issued by the IRS.
  • Board of director’s resolutions and minutes, or similar records related to the plan.

 2)      Are the plan’s operations based on the terms of the plan document?

It seems like the operations would naturally be based on the terms. However, it’s easy to drift from the terms of the plan document. One of the most significant areas of drift is the definition of compensation. Make sure that all actions taken by the plan are and have been communicated to employees.

3)      Is the plan’s definition of compensation for all deferrals and allocations used correctly?

A plan’s definition of compensation must satisfy the rules for determining the amount of contributions. This can get tricky when considering deferrals and different types of allocations, such as bonuses. For 2010, the amount of compensation taken into account under the plan cannot exceed $245,000.

If you need more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

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