Terms You need to Know as the Administrator of a 401(k) Plan
One of the first questions that we get from new clients as we begin the audit planning process relates to some of the terminology used. If you have not been through the audit process, or are a new 401(k) plan administrator, the terms used can be confusing. These terms and the differences between some of the roles involved are important to ensure the plan remains compliant with Department of Labor and Internal Revenue Service regulations, the Plan Document and ERISA (the Employee Retirement Income Security Act of 1974). Some key terms are:
- Plan Sponsor – this is the company that offers the plan to its employees.
- Plan Administrator – the named individual who has day to day responsibility for working with the plan to ensure all transactions are processed accurately and timely.
- Plan Trustee – the individual designated in the Plan Document or Trust Document that has authority to manage and control plan assets.
- Financial Advisor – this individual provides investment advice or guidance to the plan and the plan Trustee to assist in asset selection or investment performance review.
- Recordkeeper – usually a third-party provider that processes and tracks transactions at the participant level such as contributions, loan activity, distributions, etc.
- Third Party Administrator (TPA) – Assists the plan with annual ERISA compliance including discrimination testing, Form 5500 preparation and filing, participant notice preparation and Plan Document maintenance.
- Custodian – another third-party provider that holds the plan assets.
- Party-in-Interest – For benefit plans, a party-in-interest is defined as any plan fiduciary (Plan Trustee, Plan Administrator), any service providers to the plan (third party administrator, custodian, auditor) or the employer or any affiliate, among others. Transactions between these parties and the plan are limited and subject to specific Department of Labor regulations.
- Discrimination Testing – testing conducted by your recordkeeper or TPA to ensure your plan remains compliant with various Internal Revenue Service (IRS) regulations. Failed testing may require corrective actions such as corrective refunds or additional funding into the plan.
- Form 5500 – required informational reporting via an IRS Form 5500. Various schedules are required depending on the plan type and provisions. These forms are due to be filed by the end of the seventh month after the plan year-end. An extension for filing can be requested which provides an additional 2 ½ months to complete the filing.
- Audit requirement – generally, when your plan has over 100 eligible participants, the plan will need an audit by an independent public accountant (CPA). There are more specific rules around the definition of eligible participant, and something called an 80-120 rule (see other blog posts concerning these items for clarification). If an audit is required, it must be attached with the Form 5500 filing. Extensive fines and penalties can accrue to the company for not filing, not filing timely and/or not attaching a required audit report with the filing.
At Summit CPA, we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit, contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.