Choosing a 401k Audit Firm

Choosing a 401k Audit Firm for Starter 401(k) Plans: A Streamlined Option for Small Employers

A Starter 401(k) plan is a simplified retirement plan designed for employers who do not already sponsor retirement plans, offering a way to start a qualified 401(k) with minimal compliance burden. Under this design, all participating employees may make salary deferrals (including Roth), but the plan prohibits any employer contributions (no matching or profit-sharing). To ease start-up, the Starter 401(k) carries fewer administrative requirements – for example, it is automatically exempt from the usual nondiscrimination (ADP) and top-heavy testing – but in exchange the law caps each participant’s deferrals at a low fixed limit (currently $6,000 plus a $1,000 catch-up for those 50+). In short, a Starter 401(k) makes it easier to launch a plan by sacrificing higher savings potential for simplicity.

Introduction to Starter 401(k) Plans

A starter 401(k) plan is an excellent way for small businesses and organizations to provide their employees with a retirement savings option. These plans are designed to be efficient, cost-effective, and easy to manage, making them an ideal choice for companies that are just starting to offer a 401(k) plan to their employees. With a starter 401(k) plan, businesses can attract and retain top talent, while also helping their employees save for their future. As a CPA firm with extensive experience in employee benefit plan audits, we can help guide you through the process of setting up and managing a starter 401(k) plan.

Employer and Employee Eligibility

Eligible employers are generally any business of any size that does not currently maintain another qualified plan. If an employer has previously had a retirement plan but it was terminated, the Starter plan can still be adopted provided the prior plan ended at least 12 months ago. Notably, the Starter 401(k) imposes no employee-count limit – even very large employers could adopt it if they have no existing plan.

Employee eligibility in a Starter 401(k) is also straightforward for plan sponsors. The plan must use the standard 401(k) entry rules of “age 21 and one year (1,000 hours)” at minimum. All eligible workers must be automatically enrolled and allowed to defer, except for those under age 21, those with less than one year of service, and bona fide collectively bargained employees. In addition, long-term part-time employees must be allowed to participate.

Contribution Limits and Auto-Enrollment

A Starter 401(k) imposes a hard cap on employee deferrals for each calendar year. Each participant’s elective deferrals (traditional or Roth) are limited to the lesser of 15% of compensation or $6,000 for 2024 (with a $1,000 catch-up for age 50+). This cap is fixed by law regardless of the year’s standard 401(k) deferral limit.

Starter 401(k) plans must include an automatic enrollment feature. Each eligible employee is automatically enrolled in the plan at a deferral rate of at least 3% of pay, escalating by 1% each year, until the rate reaches at least 10% (and no later than 15%). Employees may opt out or elect a different contribution level.

Benefits and Features

Starter 401(k) plans offer a range of benefits and features that make them an attractive option for small businesses and organizations. These plans are designed to be flexible and adaptable, allowing businesses to customize their plan to meet their specific needs and goals. Some of the key benefits and features of starter 401(k) plans include:

  • Easy administration and management
  • Low costs and fees
  • Flexible plan design and investment options
  • Ability to attract and retain top talent
  • Help employees save for their future
  • Compliance with ERISA and other regulatory requirements
  • Access to specialized knowledge and expertise from a CPA firm
  • Efficient audit process and quality audit services

Plan Design and Investment Options

When it comes to designing a starter 401(k) plan, there are several factors to consider. Businesses need to think about their goals and objectives, as well as the needs and preferences of their employees. Some key considerations include:

  • Plan design: What type of plan is best for your business? Should you offer a traditional 401(k) plan or a Roth 401(k) plan?
  • Investment options: What investment options should you offer to your employees? Should you include a range of mutual funds, target date funds, and other investment options?
  • Fees and costs: What are the fees and costs associated with the plan, and how will they be paid?
  • Administration and management: How will the plan be administered and managed, and what are the responsibilities of the plan sponsor?
  • Compliance: How will the plan comply with ERISA and other regulatory requirements?
  • Audit requirements: What are the audit requirements for the plan, and how will they be met?
  • Specialized knowledge: What specialized knowledge and expertise is required to manage the plan and perform the audit?

Administrative Advantages vs. Limitations

The biggest selling point of a Starter 401(k) is its complete administrative simplicity. It is exempt from the usual annual nondiscrimination (ADP/ACP) and top-heavy tests. This means lower plan fees and less paperwork. There are no matching or profit-sharing obligations, and recordkeepers have fewer data inputs to manage.

However, these simplifications come with trade-offs. The fixed $6,000 deferral limit is far below what is allowed in a standard 401(k). Without an employer match or profit-sharing, the plan may be viewed as a less generous benefit by employees. The preset design cannot be customized: no service-based eligibility beyond the 1-year rule, no vesting schedule, and no allocation differences by employee class.

Comparison with SEP and SIMPLE Plans

A SEP IRA allows only employer contributions and no employee salary deferrals. By contrast, a Starter 401(k) allows employee deferrals but prohibits employer contributions. A SIMPLE IRA allows employee deferrals and mandates an employer contribution, with higher contribution limits than a Starter 401(k) but also more cost.

In summary, a Starter 401(k) sits between SEP and SIMPLE in design, helping employers determine the best option for their needs. It allows employee deferrals like a SIMPLE, prohibits employer contributions like a SEP, and is simpler than a full 401(k).

Compliance and 401 k Audit Considerations

A Starter 401(k) must still comply with ERISA and IRS rules, including filing necessary documents like Form 5500. This includes preparing a Summary Plan Description and issuing annual notices. Although certain tests are waived, the plan must ensure timely deferral deposits and proper disclosures.

If a Starter plan crosses the audit threshold (typically 100+ participants), an independent CPA must audit the plan, and it must be audited by a qualified third-party CPA firm. Employers may hire a 401k audit firm to perform the required financial audit and review compliance. Some may engage a 401k audit firm before hitting the threshold as a best practice.

Even if an audit is not required, a Starter plan may be subject to IRS or Department of Labor review, and an audit report may be necessary. Detailed documentation and possibly third-party review (by a 401k audit firm or ERISA attorney) are good safeguards.

Working with an Audit Firm

When it comes to working with an audit firm, it’s essential to choose a firm that has extensive experience in employee benefit plan audits. A good audit firm can provide valuable guidance and support, helping businesses to navigate the complex world of 401(k) plans and ensure compliance with regulatory requirements. Some key factors to consider when choosing an audit firm include:

  • Experience: Does the firm have extensive experience in employee benefit plan audits?
  • Expertise: Does the firm have specialized knowledge and expertise in 401(k) plans and ERISA?
  • Quality: Does the firm have a commitment to quality and a reputation for providing high-quality audit services?
  • Technology: Does the firm use the latest technology and tools to perform audits and provide services?
  • Communication: Does the firm have good communication skills and a willingness to listen to clients’ needs and concerns?
  • Cost: What are the costs and fees associated with the firm’s services, and are they competitive?

Audit Services and Support

At our firm, we offer a range of audit services and support to help businesses manage their 401(k) plans and ensure compliance with regulatory requirements. Our services include:

  • Audit and assurance services: We provide high-quality audit and assurance services to help businesses ensure compliance with ERISA and other regulatory requirements.
  • Consulting services: We offer consulting services to help businesses design and implement their 401(k) plans, as well as provide guidance on plan administration and management.
  • Tax services: We provide tax services to help businesses navigate the complex world of tax regulations and ensure compliance with IRS requirements.
  • Audit support: We offer audit support services to help businesses prepare for and respond to audits, as well as provide guidance on audit requirements and procedures.
  • Specialized knowledge: We have specialized knowledge and expertise in employee benefit plan audits, and can provide valuable guidance and support to businesses.
  • Efficient audit process: We have an efficient audit process that helps businesses save time and money, while also ensuring compliance with regulatory requirements.
  • Quality audit services: We provide high-quality audit services that meet the needs of businesses and help them achieve their goals.

Long-Term Growth, Transition, and Fiduciary Responsibilities

As the company grows, sponsors should reassess the plan to meet evolving expectations. The $6,000 limit may become restrictive, and lack of matching may affect employee engagement. A Starter plan may eventually require a formal audit as the participant count grows. At some point, upgrading to a traditional or safe-harbor 401(k) may offer better flexibility and tax benefits.

Conclusion

Starter 401(k) plans are a useful tool for small businesses wanting a low-hassle retirement plan. They eliminate traditional barriers to offering 401(k) benefits, but with lower savings potential and rigid rules. Employers should consider long-term strategy, plan flexibility, and compliance support as the business evolves. Engaging a 401k audit firm may help ensure ongoing compliance and prepare for future transitions, while also addressing fiduciary responsibilities.