For employers or plan sponsors with 401(k) plans with 100 or more participants with balances, here’s how to prepare for your first 401(k) plan audit.
Step One: Determine whether your 401(k) plan requires an independent audit.
Firstly, who makes this determination?
The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) establish rules and regulations for 401(k) plans and their audits. The Department of Labor (DOL) makes sure that plan sponsors comply with ERISA.
Then, which 401(k) plans must be audited?
If your organization has a “large” 401(k) plan, then an independent firm must audit your plan’s financial statements.
According to the most recent regulations, “large” is generally defined as a plan with 100 or more participants who carry a balance in their 401(k) at the start of your plan year. However, there are a few exceptions, like the 80/120 rule.
Why audits?
Because what’s more fun than a good audit, right? Ha.
The purpose of annual audits is to make sure your plan is compliant with ERISA and the IRC, ultimately protecting plan participants and ensuring that the plan is functioning appropriately. Plan sponsors and administrators must hire an outside firm for independent 401(k) plan audits. (Sponsor, administrator, who? Read here to learn who’s who on your team of benefit plan service providers.)
When are 401(k) plan audits due?
The independent auditor’s report is provided to you, to submit with Form 5500, your plan’s annual report to the IRS.
Form 5500 must be filed by the last day of the 7th month following the end of your 401(k) plan’s year. So, for businesses whose fiscal year is a typical calendar year (ending December 31), the deadline is July 31.
Companies may file for an extension, in which case Form 5500 and accompanying financial and audit reports are due on October 15. Missed deadlines can lead to costly penalties.
Action steps:
- Determine the number of 401(k) plan participants with balances as of the first day of your last plan year. Pro tip: Don’t forget to include terminated employees.
- No audit required? Consider this (highly!) recommended alternative to ensure continued compliance: Agreed-upon Procedures.)
Step Two: Gather and organize your plan documents.
Now that you’ve established that you need one, here’s how to prepare for your first 401(k) plan audit: gather and organize the needed documents. Every 401(k) audit begins with a review by the auditor of your organization’s 401(k) plan documents. These documents make up your permanent audit file, which your auditors will refer to year after year. Here’s a checklist of documentation to put together in preparation for your first audit:
Organizational Plan Documents
These are the documents that define your benefits plan.
- Executed plan document, including adoption agreement.
- Current IRS determination or opinion letter for the plan document.
- Current and historical summary plan descriptions and summaries of material modifications.
- 401(k) loan policies.
- Other organizational documents as applicable.
Current Year Plan Financials
The retirement plan’s most recent financial statements and supporting documents.
- Census data for your employees, including name, date of birth, date of hire, compensation, hours worked and termination date (if applicable).
- The trust report.
- The certification statement (if applicable).
- Participant statements or reports.
- Contribution schedules, showing employee amounts contributed to the 401(k) plan during the year.
- 401(k) loan schedules.
Previous Year Plan Details
The auditing team will also ask for the previous year’s financial statements, summaries, and descriptions for comparison, so they can understand changes in your 401(k) plan from year to year.
- Prior years’ Form 5500 filed with the DOL.
- Prior years’ audited financial statements—if this isn’t your first-ever 401(k) audit.
Process and Control Documentation
- How participants make elections or changes to deferral percentages.
- How payroll treats different types of income, paying special attention to off-cycle payrolls.
- How employee and employer contributions are allocated to participant accounts.
- How participants select investment options.
- Allocation of gains and losses on those investments.
- Transfers among investment options.
- Distribution requests from participant accounts.
- Calculating the proper vested portion.
- Other processes and controls, as applicable.
- Pro tip: Many of these are handled by a third-party service provider. When choosing a 401(k) plan auditor, hire the one who will work directly with your service providers, saving you time and effort.
Additional Documentation
- Any executed amendments to the plan document.
- Executed administrative/governing committee minutes for the plan.
- Executed board minutes having to do with the plan.
- Service agreements with any of your benefits plan service providers, for example:
- Trust and recordkeeping agreements with plan custodian and recordkeeper.
- A copy of the fidelity bond insurance of the plan
- Important correspondence or agreements related to the plan
Step Three: Relax! Your auditor will take it from here.
Once your auditing team completes their review and audit of your documentation, financials, and transactions, they will prepare an audit letter. This letter will report anywhere your 401(k) plan fell short of compliance, as found in the audit.
Now that you know how to prepare for your first 401(k) plan audit, your next job is to choose an auditing firm. A good auditor will make the process as quick and painless as possible, so it’s important to choose the right one.
As a 401(k) plan auditing firm, we have focused on audits and audits only for over 10 years. We’re here to answer your questions and help you prepare for your first audit. Contact Cassell Plan Audits today.
