Does My Plan Need an Audit ?
401 ( k ) deferrals : Don ’ t exceed the limit !
Maximum individual contribution testing : Similar to maximum deferral testing , the combined amount of a participant ’ s employee and employer contributions cannot exceed a yearly maximum . This combined limit is the lesser of $ 66,000 for 2023 , $ 69,000 for 2024 , or the participant ’ s total compensation . Catch-up deferral contributions are not included in this limit . This limit is known as the annual additions limit or 415 limit and is an important factor when calculating a maximum company contribution .
Maximum employer contribution : The employer ’ s tax deduction cannot exceed 25 % of compensation for plan participants . This is known as the 404 limit and is also an important factor in the calculation of a maximum company contribution .
Top-heavy testing : A plan is considered top-heavy if 60 % or more of the plan assets belong to key employees . A minimum contribution may be required if the plan is topheavy . Many safe harbor plans are designed to satisfy topheavy testing .
When calculating a contribution for a participant or the plan , these are some of the parameters that determine the permitted amount . Understanding this terminology may provide clarity to the contribution options provided for a plan year .
Does My Plan Need an Audit ?
The main determining factor in whether your plan needs an audit performed by an independent qualified public accountant is the participant count . An audit will be required if the beginning of year participant count is more than 100 . For the plan year that began in 2023 , there is a change to how the participants are counted . Prior to this , the count included active participants — regardless of whether or not they had an account balance — as well as terminated participants who had an account balance . Now , participants without an account balance are no longer included in the count . This is exciting news because it means that some plans who required an audit for 2022 may no longer require an audit for 2023 .
For plans that hover around the 100-participant mark , there is a rule in place to help stabilize the audit requirements from year to year . The 80-120 rule states that if the participant account is from 80 to 120 participants , the plan may retain the same audit status as the previous year . In practical terms , this means that an audit is not required until the participant count reaches 121 . However , once an audit is required , it continues to be required until the participant count drops to 99 or less .
In addition to participant count , the type of assets held in the plan may cause the plan to require an audit , even if the participant count is under 100 . Small plans are required to have an audit unless the plan fulfills the requirements of one of these exemption waivers :
• At least 95 % of the plan ’ s assets are qualifying plan assets . This criterion is satisfied by most small plans . Qualifying plan assets include qualifying employer securities , participant loans , shares issued by a regulated financial institution , registered mutual funds , investments and annuities issued by an insurance company , and certain assets in an individual account of a participant or beneficiary .
• Less than 95 % of the plan ’ s assets are qualifying , but a fidelity bond is in effect . This fidelity bond must cover 100 % of the non-qualifying assets , or provide coverage based on standard ERISA bonding rules , based on whichever value is greater .
Since a large plan audit count is now based solely on individuals with an account balance , paying out your terminated participants could help to lower your participant count . It may be time to review your cash out limit , plan assets , and the account balances of terminated participants in order to minimize the need for an accountant ’ s audit in the future .
401 ( k ) deferrals : Don ’ t exceed the limit !
Excess deferrals occur when a 401 ( k ) participant defers a greater amount than the annual IRS limit permits . The annual deferral limit was $ 22,500 for 2023 and $ 23,000 for 2024 . For participants 50 years old and older , an additional $ 7,500 can be deferred .
When this limit is exceeded , excess deferrals and earnings need to be removed from the plan and returned to the participant . Employer matching on this excess likewise
REA & ASSOCIATES BENEFIT INSIGHTS | WINTER 2024 2