What to Expect: First Time 401(K) Plan Audit
When your employee benefit plan grows beyond 100 eligible participants, it triggers the need to take deeper look at whether an audit is needed.
At first sight, an audit requirement can appear to be an intimidating and daunting task. Your audit team will ask you a number of questions you may expect about the plan, including employee census and payroll data, contribution history, plan financial statement information, and more. What you may not expect, however, is information requests and questions about items and events that occurred in previous years, or an audit sample selection from former participants to audit for past errors. Proper record retention and planning ahead are key to an efficient audit process.
Generally, when a 401(K) plan has 100 or more eligible participants, it’s considered a “large plan” for DOL and IRS reporting purposes, which requires an annual audit. The audited financial statements must be included in the plan’s annual report, which is filed with the DOL in conjunction with the Form 5500. The annual report is generally due within seven months from the end of the plan year, though there is an option to extend your filing due date to nine and a half months from the end of the plan year. While 100 eligible participants is the general threshold for large-plan status, there is some wiggle room. Plans that have between 80 and 120 eligible participants at the beginning of the plan year are permitted to file their Form 5500 in the same way they did the year prior. For example, a plan that had 70 participants on January 1, 2017 and filed as a small plan for 2017, and then grew to 115 participants by January 1, 2018, may elect to file as a small plan again—and avoid an audit—for the 2018 plan year. An audit would not be triggered in this example until the eligible participants exceeded 120 as of the first day of the plan year.
An important reminder: The number of eligible active employees are counted even if they have never elected to participate and don’t have an account. Therefore, it is possible for you to meet the audit requirement if you have, for example, 121 eligible participants as of January 1st, but only 25 active participants. Former employees who have left their 401(k) funds in the plan are also included in the participant count.
What to Expect
To ensure a smooth process, plan sponsors should keep comprehensive records and plan ahead by reviewing the auditor-requested items in advance of the audit start date. Many times, the third-party administrator can assist the plan sponsor and provide much of the necessary information, including:
- Plan documents and amendments
- IRS opinion letter on the plan document
- Summary plan description and any modifications
- Agreements with service providers
- SOC report covering third-party administrator internal control processes
- Employee census (list of all paid employees for the year including key demographic data)
- A listing of contributions remitted to the trust, by pay period
- Trust and recordkeeping reports
- Independent appraisal for company stock or other non-traditional investments held by the 401(k)
- Distributions, loans or other plan activity
- Proof of insurance coverage for employee crime (fidelity bond)
- Prior Form 5500 filings and draft of current year Form 5500
Since your auditor needs to obtain a solid understanding of how your 401(K) plan works, it is important to offer full disclosure of any issues related to the plan in order to ensure compliance with your plan document, as well as the DOL and IRS requirements. Just like the plan sponsor has a fiduciary duty to operate the plan responsibly, the auditor has a responsibility to protect the interests of the participants by ensuring the plan is operated in accordance with the plan document and the laws that govern it. Throughout the audit process, the auditor might identify issues that could jeopardize the plan’s qualified and tax-exempt status if not corrected.
While beyond the scope of an independent audit, a knowledgeable auditor can help the plan sponsor understand how to avoid future mistakes. This may include an introduction to a tax specialist that can help your business utilize a variety of IRS and DOL programs to fix issues within their plan.
Your auditor may prepare a draft of the report or review a draft prepared by plan management. It should include financial statements and related footnote disclosures, as well as supplemental information as required by the DOL. After you approve the report, the auditor will give you a formal final copy, which should be attached to the Form 5500 by the person responsible for e-filing the annual report (typically your third-party administrator).
There is much to navigate, but choosing an auditor well-versed in benefit plan audits can be extremely helpful in guiding plan sponsors through the first-time process.
This article originally appeared in BDO USA, LLP’s “Selections” blog. Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com.
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