Here are more questions from the IRS to ask yourself as you prepare your plan for an audit:
1) Were employer matching contributions made to all appropriate employees under the terms of the plan?
Not as simple as it sounds, employers can unknowingly violate the terms of the plan with matching contributions.
- Check your plan for rules regarding deferred income.
- Properly identify plan entry dates and hours of service (if applicable).
- Be sure to calculate amounts on an annual instead of pay-period basis.
- Be aware of any changes made in the plan since the last audit to be sure to comply with the changes for all participating employees.
2) Has the plan satisfied the 401(k) nondiscrimination tests (ADP & ACP)?
ADP is Actual Deferral Percentage and ACP is Actual Contribution Percentage. Each year there must be a balance of the two (ADP and ACP). This has to do with the amount contributed by non-highly compensated employees (NHCEs) in relation to the amount contributed by highly compensated employees (HCEs). As the amount contributed by NHCEs grows, the amount that HCEs can defer increases. See the IRS document or talk with your auditor if you have questions in this area.
3) Were all eligible employees identified and given the opportunity to make an elective deferral election?
It’s important for your plan to have a definition of eligible employees. Generally, this is all employees who receive a W-2. You can reduce the risk of excluding employees from the election opportunity by keeping records of dates of birth, dates of hire, dates of termination, number of hours worked, compensation for the plan year, 401(k) election information and any other information necessary to properly administer the plan.
For more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.