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June 29, 2022

5 Areas That Will Require Your Focus During a 401(k) Plan Audit

If 2022 will be the first year audit for your company 401(k) plan, it can be an apprehensive time as you don’t know what to expect. Although these audits are primarily compliance audits and they can involve many different technical areas, there are 5 areas that we believe are the most important for the success of your audit.

ACCURATE DATA FOR PARTICIPANT TRANSACTIONS

This may be a no-brainer. Your auditor will want to review specific transactions that occurred during the plan year to make sure they were handled accurately, completely, and timely. Also, that the transaction followed the participant instructions. For example, the auditor will want to verify that if 5% of each pay period’s compensation for a participant was withheld and deposited into their plan account that was want they wanted.

The auditor will recalculate the 5% deduction and ensure it was actually deposited into the correct participant account for each pay period but they will also need to verify either directly with the participant or by viewing an action taken online or in hardcopy paper format that the participant directed the 5% amount.

Areas involved include participant deferrals, company match or profit share contributions, distributions, participant loans, and fees. The auditor will also want to verify that eligibility for plan participation is handled properly.

CONTRIBUTION TIMELINESS

Department of Labor regulations require that for large plans (those that would be subject to audit) they submit their contributions withheld from participant paychecks in a timely manner. This is defined as remitting as soon as administratively feasible and as soon as the withheld funds can be segregated from company assets.

In most cases this is 7 days or less although the DOL does not provide a specific timeframe. The DOL literature also describes a safe harbor for contribution submissions, but these do not apply to large plan filers.

Your auditor will schedule out the time it took for each pay period contribution amounts to be transmitted to the trust. They will look for a pattern or average amount of time required to submit. The timing pattern can often lead to late contributions. It is very important for each plan to develop a payroll processing timeline that requires the withheld amounts in each category to be submitted to the receiving party (401(k) plan trust, insurance company, IRS, etc.) within a set amount of time. Then, each pay period this timeline needs to be executed to ensure no late deposits are identified by the auditor.

Late contributions can be administratively time consuming to correct and will lead to additional cost for the plan sponsor.

INVESTMENTS

Your auditor will need to review the investments in your plan and validate the ending balances, pricing on those investments, review the transaction history involved and also ensure the accounting (fair value calculations or contract value as appropriate) is accurate and documented.

In many cases, an asset certification by the custodian or trustee makes this process easier but if not, you will need to provide investment details to your auditor or ensure that your service provider can provide it. As the investment balances are the main component of the financial statements, this is a critical area for the audit.

COMPLIANCE

As mentioned above, these audits involve technical compliance issues. Areas your auditor will want to explore include the following:

  • Discrimination testing for the plan
  • 1099-R issuance and vesting recalculations for distribution
  • Ensuring all required disclosures were made to plan participants in a timely manner
  • Reviewing the fidelity bond for the plan for appropriate coverage
  • Ensuring the Form 5500 is accurate and complete
  • Reviewing to ensure tax handling of accounts is appropriate (pre-tax versus Roth contributions for example)

These areas may be handled primarily by your service providers but if errors are identified, the auditor and regulatory authorities such as the DOL and IRS will expect the Plan Sponsor to take corrective action as needed.

INTERNAL CONTROLS AND RISK ASSESSMENT

A key component of the audit is to review the internal controls in place to ensure plan activities and requirements are handled accurately, completely and timely in all circumstances. Controls help prevent errors and omissions or detect them when they occur so corrective action can be taken.

Your auditors will need to review the controls in place for your plan so documentation in these areas that is done ahead of time will help you stay ahead of the game and also help you to recognize areas that may need additional work to strengthen the control environment.

There is more to a 401(k) Plan audit than the above items but if you focus on these areas you will have a good start to a successful audit and one without too many serious findings.

As the plan sponsor, when it’s time to audit your 401(k) plan, it’s vital that you hire an experienced auditor to ensure your plan is in compliance. At Anders we specialize in retirement plan audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine.  We also offer flat-fee pricing so there are no surprises on your bill when the job is complete.

To get started, request a free 401(k) audit consultation below or contact the team at (314)-886-7913 to schedule an appointment.

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