Top 3 mistakes on audits this year

December 21, 2022

A 401(k) audit can feel like a test you didn’t study for. After all, you’ve got lots of other priorities. Here’s the catch: Just three mistakes make up more than half the issues Cassell Plan Audits has seen so far this year.

The last few audit seasons haven’t been easy on small businesses. Leaders are still feeling shock from COVID, supply chain woes, and the Great Resignation.

If you’re under pressure and short-handed, it’s even more crucial to keep a close eye on your audit preparations. Oversights now become issues later.

Let’s review some common 401(k) audit errors:


1. Failing to follow policies on treatment of compensation vis-a-vis 401(k)

When it comes to your 401(k), written documentation is key.

And documentation only works if you stick with it every time.

Failing to follow those policies when it comes to treatment of different types of compensation can mean employee withholding is not calculated properly and you don’t match employee contributions where required. In the end, the business pays back the shortfall—and may even get fined.

Ensure all forms of employee compensation throughout the year are coded correctly and follow the rules. That includes bonuses, extra pay runs, and all the rest.


2. Using new technology that doesn’t provide documentation for compliance

Everyone’s moving to the cloud, but the IRS is old-fashioned.

All technology must provide verifiable and dated documentation of changes to employee 401(k) accounts, whether initiated by you or the employee.

More than one business has been wowed by a cloud platform where staff change their 401(k) allocation just by sending a direct message to HR.

Then audit season rolls around. Soon, they realize they can’t find any of those messages. Often, enterprise software deletes old DMs on a rolling basis. 

Verify audit compliance before you start.


3. Underestimating the importance of document retention

It’s common knowledge to retain employee records for at least seven years.

But that doesn’t tell the whole story.

As long as someone has an account in your 401(k) plan, you need to retain all their documents in order to prove participant benefit due to them. Employees are notorious for not moving their plans, and it could be your responsibility for many years to come.

Even if you move, close down your office, change service providers, shred tons of files—

Plan as if you’re going to retain employee records forever.

If it turns out to be less than that… it’s a pleasant surprise.

Contact Cassell Plan Audits for expert guidance.

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