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It’s already midyear, and that means it’s the perfect time to review the audit requirements for your company-sponsored employee benefit plans. One of the most important and complex audits is the annual audit of your 401(k) plan. Here are some general tips and guidelines to help you understand benefit plan audits, when you’ll need one, and what to expect during the process.

When to Begin: Understanding the 80-120 Rule

Form 5500
If you’re involved in maintaining your company’s 401(k) plan, you’re already familiar with the Form 5500. The annual process of filling out the required Form 5500 has a helpful side benefit of determining your plan’s exact number of participants. Lines 5 and 6 on the Form 5500 are used to tally the total number of plan participants at the beginning and end of the plan year.  Participants include people in the following four categories:

Following the 80-120 Rule

If your plan has never had an audit, or if your participant count fluctuates from year-to-year, you’ll need to follow what’s called the 80-120 rule. In short, the 80-120 rule spells out your plan’s annual filing requirements if it is hovering somewhere between 80 to 120 participants.

For plans with participant counts in this range, the Department of Labor (DOL) allows the plan to use the same filing status as it used in the filing of its prior year Form 5500. There are two filing statuses, known simply as “large” plan (100+ participants) and “small” plan (under 100 participants). Plans filing as “large” plans generally have an annual audit requirement, while plans filing as “small” plans do not.

The 80-120 rule prevents plans with fluctuating participant counts from having to continually change from a “large” plan to a “small” plan each year. For example, the 80-120 rule allows a plan with 90 participants at the beginning of the previous year and 110 participants at the beginning of the current year to continue to file as a “small” plan in the current year. If the 80-120 rule were not in place, there would be unnecessary disruptions caused by the 100 participant cutoff.

While you won’t need your first audit until you exceed 120 participants at the beginning of a plan year, you’ll want to start preparing for a plan audit as you approach that figure. If your business is expanding, acquiring another business, or simply experiencing organic growth, you’ll want to contact us to ensure you’ll be in good shape for next year’s audit deadlines.

How to Prepare: The Basics of Benefit Plan Audits

To prepare for your annual 401(k) plan audit, you’ll want to have all of your materials in order ahead of time so that the process is as efficient as possible. Here’s a list of documents to prepare in advance:

The Outcomes: What to Expect from Benefit Plan Audits

In addition to issuing an audit report on the 401(k) plan’s financial statements, plan auditors will also communicate to management any internal control or operational deficiencies that they noted during the audit. Since 401(k) plans can be complicated to administer, it’s crucial that plan sponsors and administrators understand the plan documents and amendments. Most deficiencies result from inadvertently not following the provisions of the plan document. The resulting consequences can range from having to voluntarily correct the issues, being fined by the Department of Labor, or in the worst-case scenario, having the plan disqualified.


At Cray Kaiser, we recognize that having a sound 401(k) plan is one of the pillars of security that your employees count upon. Since every business has unique needs and methods, you’ll want to make sure you’re working with a team that has extensive small business experience and can be flexible to your specific plan. Contact us today so that we can make sure you’re well prepared for benefit plan audits.

Mutual funds offer an efficient means of combining investment diversification with professional management. Their income tax effects can be complex, however, and poorly timed purchases or sales can create unpleasant year-end surprises.

Mutual fund investors (excluding qualifying retirement plans) are taxed based on activities within each fund. If a fund investment generates taxable income or the fund sells one of its investments, the income or gain must be passed through to the shareholders. The taxable event occurs on the date the proceeds are distributed to the shareholders, who then owe tax on their individual allocations.

If you buy mutual fund shares toward the end of the year, your cost may include the value of undistributed earnings that have previously accrued within the fund. If the fund then distributes those earnings at year-end, you’ll pay tax on your share even though you paid for the built-up earnings when you bought the shares and thus realized no profit. Additionally, if the fund sold investments during the year at a profit, you’ll be taxed on your share of its year-end distribution of the gain, even if you didn’t own the fund at the time the investments were sold.

Therefore, if you’re considering buying a mutual fund late in the year, ask if it’s going to make a large year-end distribution, and if so, buy after the distribution is completed. Conversely, if you’re selling appreciated shares that you’ve held for over a year, do so before a scheduled distribution, to ensure that your entire profit will be treated as long-term capital gain.

Most mutual fund earnings are taxable (unless earned within a retirement account) even if you automatically reinvest them. Funds must report their annual distributions on Forms 1099, which also indicate the nature of the distributions (interest, capital gains, etc.) so you can determine the proper tax treatment.

Outside the funds, shareholders generate capital gains or losses whenever they sell their shares. The gains or losses are computed by subtracting selling expenses and the “basis” of the shares (generally purchase costs) from the selling price. Determining the basis requires keeping records of each purchase of fund shares, including purchases made by reinvestments of fund earnings. Although mutual funds are now required to track and report shareholders’ cost basis, that requirement only applies to funds acquired after 2011.

When mutual funds are held within IRAs, 401(k) plans, and other qualified retirement plans, their earnings are tax-deferred. However, distributions from such plans are taxed as ordinary income, regardless of how the original earnings would have been taxed if the mutual funds had been held outside the plan. (Roth IRAs are an exception to this treatment.)

If you’re considering buying or selling mutual funds and would like to learn more about them, give us a call.

*This newsletter is issued quarterly to provide you with an informative summary of current business, financial, and tax planning news and opportunities. Do not apply this general information to your specific situation without additional details and/or professional assistance.

Wedding bells bring rejoicing – and financial changes. If you’re marrying for the second time, the changes might seem overwhelming. On the surface, tax and financial planning for a second marriage is similar to that of a first marriage, but there’s more to taxes and marriage the second time around.


For example, no matter what month you hold the ceremony, the IRS will consider you married for the full year. That means employer-provided fringe benefits and taxes withheld from your paychecks could require adjustment. Depending on how much each of you earns and your past financial history, you’ll have to decide what filing status will be most beneficial, and how best to take advantage of tax breaks that may become available.


With a second marriage, you have even more decisions to make, including how you’ll merge your assets. Will you purchase a new home? If both of you already own separate homes, you may each qualify for a $250,000 federal income tax exemption on the profit from the sale, as long as you have lived in the home for at least two of the last five years. If only one of you meets the requirements for the exemption, consider selling the qualifying home and living in the other for a while.


You or your spouse might also have substantial debt or financial obligations. Discuss your financial histories, including alimony or child support still owed and past bankruptcies. Decide who will provide for the college expenses of the children in your now-combined household. Depending on your age, you may want to investigate the effect of the marriage on your social security benefits.


Consider estate issues too, such as updating retirement plans with new beneficiary designations and retitling bank and brokerage accounts. Be sure to discuss how heirs from previous marriages will be provided for, and remember to update your wills.


A second wedding is a joyful event for you, your new spouse, and your extended families. To give your marriage an added advantage, call us before you say, “I do.” We’ll offer our congratulations – followed by useful financial and tax planning advice.


Taxes and Marriage Checklist: After the Wedding

Don’t wait too long after the wedding to spend a little time on tax matters. Here’s a checklist of things to consider:



If you have questions about taxes and marriage, please contact Cray Kaiser today.