By Janice Fortin, CPA, MST Shareholder, Doeren Mayhew

Employee benefit plans, such as 401(k) plans, are required by the Employee Retirement Income Security Act of 1974 (ERISA) to have an annual audit if there are 100 or more eligible participants at the beginning of each plan year. With the 401(k) audit season coming to a close, how did your most recent audit go?

Whether you’re coming out bruised from your most recent audit or nearing the threshold for your first 401(k) plan audit, leverage these most recent lessons learned to best prepare for your next annual audit and alleviate the stress of the process.

Understand the Process

Make sure you understand the auditing process to help you be better prepared come time when your auditors walk in the door. Familiarize yourself with the documents they will require, the typical timeline, and what errors and weaknesses they are looking for along the way.

Know Your Responsibility

Take the time to understand your responsibility as a plan sponsor, as well as educate those involved in the process of their fiduciary responsibility. The personal liability aligned with these roles are often overlooked.

Start Preparation Early

Nothing is worse than racing to pull together the documentation needed for a 401(k) plan audit. Keeping your files updated in real-time and organized can help mitigate last minute stress. Make sure you have the following documents ready to go for your auditor:

  • Executed plan document, including executed amendments
  • Current year census
  • List of all parties in interest
  • Loan documents for all participants
  • Copies of prior years’ Form 5500 filed with the Department of Labor (DOL)
  • Copies of prior years’ audited financial statements
  • Board minutes and/or 401(k) administrative committee minutes as it pertains to the plan
  • Trust and record keeping agreements with plan custodian and record keeper
  • Copy of the plan’s fidelity bond insurance
  • Internal Revenue Service (IRS) determination or opinion letter for the executed plan document

Read Your Plan Document

Your plan document is one of the most important documents to an auditor. Taking the time to read the plan document can help you compare the way things should be done and assess if you are keeping up. Be sure to have up-to-date amendments to reflect approved changes. Otherwise, the plan isn’t considered to be operating within the bounds established by the plan documents, creating compliance issues.

Have the Right Controls in Place

Unfortunately, many plan sponsors don’t give controls over the plan enough attention, especially in a company of 100 or fewer employees. Even if you have an outside third-party administrator (TPA) your risk for fraud or error doesn’t go away, driving the need to have proper controls in place.

Review plan reporting on a quarterly basis. Don’t just focus on the investment information, look at the contributions, distributions, loans and fees paid for the period to ensure no errors occurred in the transactions.

Be sure all participant data transferred to the plan’s TPA is done so accurately and timely. For example, for any new or terminated employees the TPA should be notified as soon as possible of the change in their status. Just as equally important is relaying accurate information as it pertains to the participant’s name, social security number, hire or termination date, birth date and other items. Today, most of these plans are run by automatic software relying on the data entered to perform non-discrimination testing and calculate eligibility to make contributions or receive distributions. This makes it critical for the information to be accurate. We recommend doing a periodic self-audit to check the plan data is accurate.

Execute participant elections meticulously and promptly. If elections aren’t entered into the payroll system correctly, then incorrect withholdings will be made. Having to make corrections could be costly and at times require legal help. Prevention is much easier than correction here. Double check deferral rate changes against the uploaded information to ensure accuracy.

Download and Archive TPA Files

As a best practice you should download reports and files from your TPA’s website at least annually and maintain the files as permanent records. Most TPAs archive information after two to three years and will charge a fee to provide records older than this. This is also helpful should you change the plan’s TPA and these required records are no longer available. Don’t rely on your TPA to maintain records, they don’t always come through during an IRS/DOL audit or when participants request prior year data.

A 401(k) audit can be just as stressful as any other audit, if you are not prepared. Starting the preparations early can lead to a smoother, more efficient audit process and, perhaps, prevent audit investigations from the IRS or DOL down the road. Rely on the assistance of Doeren Mayhew’s employee benefit plan CPAs to help avoid learning lessons the hard way on your own.

Want to reach the author? Email Janice Fortin or contact her at 248.244.3003.