Preparing for a 401(k) Plan Audit

Employee benefit plan season is upon us, and many companies are facing a 401(k) audit for the first time. The mere thought of going through an audit may seem overwhelming, but there is no reason to fear the process… or the auditors! Auditors are not there to disrupt the plan sponsor or cause harm. Rather, they are there to ensure that the operations of the plan are in line with IRS and DOL standards, ensure accurate financial reporting, and, quite simply, to complete the audit because it’s a requirement for the organization. An audit will help determine if there are any issues or gaps in a plan’s processes and procedures, as well as determine if any corrections are necessary. Read on for some guidance that will help plan sponsors prepare for a successful audit. Understanding these areas will certainly put a hassle-free examination within reach!

Document Gathering and Organization

Among the first items likely to be requested by the auditor are plan-related documents. These documents should be easily accessible, organized, and current (and will also be required if the plan is ever selected for audit by the DOL). They include:

• Executed plan document and adoption agreement
• Summary plan description and summaries of material modifications, if any
• All executed plan amendments
• Current IRS determination letter or opinion letter
• Executed board and/or committee minutes relating to the plan
• Service agreements with all plan service providers
• Copy of the plan’s fidelity bond for the plan year under audit
• Prior year audited financial statements and Form 5500
• Any other agreements related to the plan

Fiduciary Responsibility

The fiduciaries of a 401(k) plan are tasked with providing plan oversight and acting in the best interests of the plan participants; however, they must be aware that they can be held personally liable if they breach their responsibilities. To ensure that the latter does not occur, the following best practices should be considered.

• Create an administrative committee that takes fiduciary, compliance, and reporting responsibility for the plan. The committee should meet regularly (at a minimum, quarterly) and minutes should be maintained.
• Establish and follow an investment policy that will serve as a roadmap for selecting, monitoring, and evaluating the plan’s investment options.
• Review plan administrative fees for reasonableness.
• Hire an outside investment advisor to assist with the above and any other plan functions.

Operational Compliance

If a plan is not operating in accordance with the provisions of the plan document, as well as those of the IRS and DOL, corrections will likely be necessary. Below are several of the more common plan errors that have become “hot buttons” for both auditors and regulators; therefore, it would be prudent for plan sponsors to focus on them, as well.

• Plan eligibility provisions not being followed
• Incorrect definition of plan compensation being used for contributions
• Untimely deposits of participant deferrals

Internal Controls

Even with the best third-party administrators (TPA), there are plenty of opportunities for errors to occur if a plan sponsor does not implement proper authorization and review controls. The TPA’s SOC 1 report, which describes the control structure at the TPA, and the testing thereof, should be reviewed annually by plan sponsors to gain an understanding of the TPA’s controls. In addition, plan sponsors should take note of the SOC 1 report user controls. These are the controls that are expected to be put in place by a plan sponsor so it can rely on the TPA’s controls.

Financial Reporting

The Form 5500 is filed for both small and large plans; however, once a plan is considered a large plan and requires an audit, additional financial reporting is required. For a large plan, the Form 5500 requires a Schedule H to be attached instead of a Schedule I (Schedule H contains more detailed information). Audited financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, are also required to be attached to Form 5500 when filed. Plan management has a responsibility to ensure the plan’s transactions are presented and disclosed in the audited financial statements in conformity with the plan provisions, while it is the auditor’s responsibility to make sure the information on the Schedule H is consistent with the audited financial statements.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.

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