If you are a Plan Sponsor for a 401(k) Plan and you just discovered that you will now need an independent accountant’s opinion or audit for your Plan annually, one of the first questions that you will be asked is what type of audit do you need?
There are two main types of 401k plan audits that can be considered, and this blog post will help you understand the difference between the two and how you can determine which is appropriate for your Plan.
WHY ARE 401(K) PLAN AUDITS NECESSARY?
Audits are required per ERISA (Employee Retirement Income Security Act of 1974).
The audit clause was enacted to help ensure participants were treated fairly by their employers/Plan Sponsors. Congress was hoping that an independent audit of larger plans would provide assurance to both participants and the general public that funds withdrawn from individual paychecks would be handled appropriately by the employer and to help ensure each participant can save for their eventual retirement.
As defined benefit plans were phased out or eliminated by employers, defined contribution plans became more popular as they were most cost effective. However, this involves taking compensation due to an employee, withholding it and then submitting those employee/participant funds along with any employer match or other employer contribution to the 401(k) participant account. For the system to work accurately, employers must abide by certain regulations including timing of deposits, internal controls to ensure funds actually get deposited, review of service provider administration to ensure errors are detected quickly and corrected.
This is where the audit comes in.
The auditor will be reviewing the transactions that occurred and ensure that they were processed accurately, completely, timely and per both the Plan requirements and current regulations.
The auditor will also prepare or review the financial statements for the Plan. This includes:
- Statements of Net Assets Available for Benefits
- A Statement of Changes in Net Assets Available for Benefits
- Footnote disclosures
- Required supplemental schedules
WHAT ARE THE TWO MAIN TYPES OF 401(K) PLAN AUDITS?
The two main types of audits (called 103a3c and non-103a3c) are differentiated primarily based upon the asset holder or custodian for the Plan.
If the asset holder can provide a valid certification over the assets, the audit can be conducted as a 103a3c audit. If not, the non-103a3c type audit applies. The main difference in types of procedures between the two audits, relates to the investments.
With the asset certification, the ending balance as provided by the custodian can be relied upon by the auditor. Also, pricing of the investments is also covered in most cases by the certification. Without that certification, more work must be done by the auditor on the investments held by the Plan. Of course, this difference will result in a higher audit fee due to the additional work needed.
DOES YOUR PLAN QUALIFY FOR A 103a3c Audit?
Consider the following:
- Who is the asset holder?
- Are they a bank, trust company or insurance company?
- Are they separately regulated by a state or federal agency?
- Do they receive audits from these agencies on a regular basis?
- Are they willing and able to provide a certification?
- What period of time will the certification cover? What reports or data will it cover?
- Will all the Plan assets be covered by the certification?
Some of these questions will require research on your part or verification with your service providers. Anders has a brochure that describes the difference in the audits and what is required for a valid asset certification. Feel free to reach out to us for a copy of these items if they would be helpful.
If you need an audit for your 401(k) plan, consider a specialized firm like Anders CPAs + Advisors. We can provide a quality benefit plan audit that is efficient and accurate. For more information on how we can help, request a free 401(k) audit consultation. For assistance, contact the team at (314)-886-7913 to schedule an appointment.
