5 Internal Control Procedures for a Smoother 401(k) Audit

April 8, 2016

401(k) plan audits can be a lengthy and grueling process.  Both the IRS and the U.S. Department of Labor hold plan sponsors to strict rules and regulations regarding the administration of these plans, and if not adhered to properly, fines may be imposed or the plans can be disqualified.  If your organization has a qualified plan, consider these 5 internal control procedures for a smoother audit:

  • Define Your Investment Policy:  The responsibilities of plan administrator and management should be clearly stated in your plan policy.  The policy should also address permitted investments; asset mix and concentration; and provide for a method of reviewing, monitoring, and taking appropriate action with regards to the plan’s overall investment return.
  • Clearly Document Your Oversight Process:  Your plan administrative committee should conduct regular meetings, and document all actions taken by the committee and/or trustees throughout the year.  Items to be considered might include a review of plan fees and investment performance; the selection process of investment options; the creation and monitoring of investment policy; reporting from service providers including third party administrators or an investment advisor; addressing employee complaints, if any; amendments to plan documents; and approval of any discretionary contributions.
  • Follow Timely Remittance of Employee Contributions:  Failure to remit participant contributions in a timely manner results in prohibited transactions, which must be separately reported to the DOL and may result in lost earnings for the Plan and penalties to the plan sponsor.
  • Properly Calculate Contributions for Eligible Compensation:  Eligible compensation is defined in the plan documents and usually, that definition consists of gross wages and adjustments for bonuses, fringe benefits, etc.  Oftentimes, the definition of compensation varies for different types of contributions allowed in the plan, and occasionally the plan will allow for participants to elect or opt-out from having wages deferred from bonus compensation.  Codes used in payroll systems should be consistent with the plan document.
  • Understand Eligibility for Re-hired or Temporary Employees:  Re-hired employees who were eligible to participate in the plan should be allowed to participate in the plan immediately on the date of their re-hire and not be subject to a waiting period (if any), applicable to new hires.  Under certain conditions dictated in the IRS Code Section 414(n), if you hire someone who previously worked for your company through a temporary staffing agency, you must credit the individual with the service he or she performed as a temp.

With diligent plan administration, organizations can save their employees numerous man hours unraveling mistakes – a timely process which could otherwise become a part of the 401(k) plan audit.  More importantly however, plan sponsors who strictly observe the rules and regulations set forth by the IRS and the U.S. Department of Labor have an opportunity to minimize their exposure to even greater risks and liabilities.

To determine if your 401(k) benefit plan is subject to an audit or for a consultation regarding your current 401(k) plan, contact JoAnn today.

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