Your company needs a 401(k) audit. What now?

Michael Reid

The first time your 401(k) plan is audited can be difficult, confusing and time consuming, but this guide should relieve some of the stress. You may feel like this audit is being forced on you, and you’d be right - the Department of Labor (DOL) requires that a plan be audited when it has more than 100 eligible participants on the first day of the plan year. So now that your plan needs an audit, allow me to help prepare you for what’s next.

1. Hire the right auditor

It is important to find a firm that has experience in auditing benefit plans because there are a lot of areas where 401(k) financial statements differ from the financial statements of a regular business, so you can’t assume every CPA is as qualified as the next. Look for firms that are members of the AICPA’s Employee Benefit Plan Audit Quality Center, which has educational and quality control requirements for firms to maintain membership (the Center actually kicked out 73 firms who weren’t keeping up in 2017).

2. Understand your 401(k) plan

This is important for any company who has a 401(k). A great way to start is to answer two simple questions:

  • Who holds fiduciary responsibility of the plan and what does that mean? Sound fiduciary policy and oversight of a plan is the cornerstone of excellent internal plan control. Many plan sponsors don’t know the risks associated with being a fiduciary of their company’s 401(k) plan - they can be held personally liable for a breach of their responsibility. Most aren’t even aware that they are the fiduciary of the plan. A person is a plan fiduciary if they have authority of the plan’s management, plan assets, and plan administration.

  • Is the plan in compliance with day-to-day operations? Setting up, changing and even contributing to the plan can be simple, but making sure the plan complies with the numerous regulations can be difficult. If the plan isn’t being operated in accordance with the provisions of the plan document, then the plan and the sponsor have a compliance issue that will need to be corrected. Below are some problem areas to be aware of when monitoring the plan:

    • Plan eligibility rules vs actual enrollment and participation

    • Definition of compensation vs actual payroll processes

    • Timeliness of depositing participant deferrals into the plan

3. Document gathering

This can make or break your audit experience. Among the first things your auditor will request are plan-related documents. Below are some of the documents that will be requested:

  • Executed plan document, including executed adoption agreement

  • Executed amendments to the plan document

  • Current IRS determination or opinion letter for the executed plan document

  • Current and historical summary plan descriptions and summaries of material modifications

  • Trust and record keeping agreements with plan custodian and record keeper

  • Copies of prior years’ Form 5500 filed with the DOL

  • Copies of prior years’ audited financial statements—after the plan’s first audit, if applicable

  • Copy of the plan’s fidelity bond insurance

  • Any other agreements or significant correspondence related to the plan

The auditor will no doubt have more requests, but this should help start the document gathering process in preparation for the audit.

Now that you know a little about what is to come, you should be fairly ready for your 401(k) audit. Here at PriceKubecka, we offer affordable, faster audits that make your life easier. If you would like a formal quote, or to learn more about our offerings, please call or email us today!