If you’ve ever put off a doctor’s appointment because you felt fine, you’ll understand why some plan sponsors don’t think much about compliance until audit season arrives.
Unfortunately, retirement plans have a lot in common with annual physicals: finding a problem early is usually easier, less expensive, and far less stressful than discovering it later.
The good news? Mid-year is actually the perfect time for a quick 401(k) plan check-up.
Not because something is necessarily wrong… Just because now is when you still have time to fix it.
Are employee deferrals being remitted on time?
If I could nominate a perennial favorite among audit findings, late remittance of employee deferrals would be a strong contender.
Many sponsors assume deposits are being submitted on time because payroll is processing normally. And usually, they are.
But “usually” isn’t the same thing as verifying.
401(k) deferrals can be delayed by:
- Payroll system software glitches (such as failed HR/payroll integrations),
- Administrative oversights (manual processing delays or key personnel taking time off), or
- Employer cash-flow problems in which the business uses withheld funds for operating expenses (a big no-no).
Mid-year is a good opportunity to review a sample of recent payrolls and confirm employee contributions are reaching the plan as soon as administratively possible, especially if you’ve had a change in payroll systems or the responsible HR employee was out on leave at some point.
Because if there’s a timing issue, it’s much easier to address in July than after year-end.
Are eligibility rules being applied consistently?
This is another area where operational reality sometimes drifts away from the plan document.
- Are you enrolling new hires in the plan when they’re supposed to enter?
- Are you tracking part-time employees correctly?
- Has anyone changed payroll or HR processes that could affect eligibility calculations?
These are just some of the areas where we see discrepancies.
Most eligibility issues don’t happen because someone intentionally ignored the rules. They happen because systems change, responsibilities shift, or people make assumptions.
And assumptions do NOT equal internal controls, unfortunately.
Has anything changed this year?
We’ve hit this drum a couple of times already in this article, but it bears repeating. It may be the most important question on the list!
Consider what’s happened since January… Are any of these true for you:
- New payroll provider?
- New TPA?
- Acquisition or merger activity?
- HR staffing changes?
- System conversions?
- Changes to plan provisions?
Any one of those can create operational risks that may not be obvious until much later.
The plan sponsors who tend to have the smoothest audits aren’t necessarily the ones with plans that never change.
They’re the ones who recognize that change creates risk and proactively review its impact.
Are loan and hardship procedures documented?
Believe it or not, undocumented or unsubstantiated 401(k) plan loan and hardship procedures are highly common issues for plan sponsors.
Common mistakes include:
- Unapproved hardship reasons: Distributing funds for emergencies not specified in the written plan document (e.g., allowing a hardship for car repairs when the plan document only covers medical or housing emergencies).
- Missing loan notes: Failing to execute and retain an official promissory note and amortization schedule for a plan loan.
- Over-the-limit loans: Approving loans that exceed IRS maximum limits (e.g., exceeding $50,000 or 50% of the vested account balance) without realizing it.
We get it… when a valued employee is having a tough time, as employers or plan sponsors, we want to help them in any way we can. It is not, however, the time to bypass the rules or skip documentation.
Do you know where your plan’s biggest risks actually are?
This is where many sponsors get stuck.
They know they should review compliance. They just aren’t sure where to focus.
That’s one reason some organizations choose to perform Agreed-Upon Procedures (AUPs) during the year, or even in lieu of an audit if they’re not required to have a third-party audit of their 401(k) plan.
Rather than waiting for the annual audit, an AUP engagement can examine specific areas of concern—such as eligibility, contribution remittances, loans, distributions, or payroll processes—to identify potential issues before it is too late to address them.
As auditors, we can’t help you fix the issues, but we can help you find them.
Think of it less as an audit and more as a compliance pulse check.
Bottom Line
A mid-year 401(k) plan check-up isn’t about creating extra work.
It’s about identifying small issues before they become larger ones.
Because the best time to discover a compliance problem is when there’s still plenty of time to fix it.
The second-best time is before your auditor finds it.
If you would like us to formally review your procedures, what’s known as Agreed-Upon Procedures, and get the peace of mind without the pressure of an audit, contact Cassell Plan Audits today.
Photo by MART PRODUCTION
