As the end of July approaches, plan sponsors must finalize their 401(k) plan audits and prepare to file their finalized Form 5500 to complete their audit. Because the audit quality ultimately depends on the plan sponsor, from the Department of Labor’s (DOL) perspective, it’s imperative to fully complete all steps and file on time to ensure a quality audit product. 401(k) audit director and practice leader Kim Moore, CPA, and audit and assurance manager Karen Hill, CPA, detailed steps plan sponsors can take to keep their filing timely, correct and in compliance with regulatory guidelines.
For most calendar-year plans, the original deadline to file your finalized Form 5500 is July 31st. You’re allowed one extension that your third-party service provider can file on your behalf, which gives you until October 15 to file. Filing under the extension doesn’t result in penalties, but if you miss the October filing date, you will be subject to penalties that will backdate to the July deadline.
Confirm Your Audit Status
The first step is to confirm the audit status with your auditor. Ensure that all final questions or clarifications have been addressed. Your auditor might need details such as participant name changes or date verifications. Prompt communication is vital. If your auditor requests information, it’s important to respond quickly rather than letting it sit unanswered, potentially putting a roadblock in your audit. Auditors also often manage several audits simultaneously. Your level of responsiveness helps dictate the attention your auditor gives you.
Preparing the Audit Report – Key Schedules
The auditor will form an opinion based on the audit and testing results. Most plans receive an unmodified opinion, indicating no material misstatements in the financial statements. The Employee Retirement Income Security Act (ERISA) requires certain schedules to be attached to the audit report. For instance, everyone should have a schedule of assets held, unless you didn’t have any assets, investments in your plan or if your plan was terminated and fully paid out. Below are several different types of schedules you may encounter:
- Schedule of assets held: Lists all investments held by the plan, including for example, mutual funds, stocks, and participant loans.
- Schedule of Delinquent Participant Contributions: Highlights late contributions that must be corrected with additional earnings submitted.
- Prohibited Transactions Schedule: Details prohibited transactions that took place. Have a discussion with your auditor to identify which actions were prohibited to prevent future occurrences.
Understanding these schedules and their implications is crucial because the DOL may come to you with questions regarding any prohibited transactions or late contributions.
Final Steps of the Audit Process
Your Form 5500 must be substantially complete, including any late contributions, before your auditor can proceed with your audit report. If you have late contributions, ask your auditor which contributions were considered late and what your next steps should be. Your third-party administrator can help you achieve those next steps, but your auditor can provide the information about which payroll dates need your attention. Your auditor may provide a draft report that will need to be revised, a process that may need to be repeated multiple times. A review process, which typically involves multiple auditors, ensures your filing is compliant with current standards.
Once your auditor releases them to you, review your final audit report carefully. Check for spelling errors, ensure all the numbers add up and watch for other discrepancies you don’t understand. Compare it to your year-end report from the trust company. There should be a reconciliation footnote if there are differences between your 5500 and your financial statements. Ask your auditor why it wasn’t included if you don’t receive one because auditors are required to have that reconciliation.
After that process finishes, you’ll need to provide approval for your financial statements, adjusting entries and respond to any additional requests for documents or clarification. You’ll then need to sign a management representation letter confirming that you’ve provided all necessary information truthfully and without restriction. This letter might also include statements about late contributions or prohibited transactions.
Filing Your Form 5500
Once you receive the completed financial statement packet, you need to file it with your Form 5500 via the EFAST system. Only include the financial statement packet and avoid attaching documents with sensitive information, such as social security numbers.
Don’t wait until the July 31 deadline to file; file as soon as your audit finishes. This helps you leave enough time to work through the filing, the site sometimes gets bogged down closer to the deadline. You’ll also have more time to undergo any necessary training, reset your password or get your credentials to log into the site.
After filing, check back after a few days to ensure your submission was successful. If there are any issues, your service provider can assist with refiling if necessary.
Post-Audit Debrief and Compliance
Consider conducting an internal debrief on the audit process to identify areas for improvement. Keep notes for the next year and maintain copies of the final Form 5500 and audit report for potential DOL audits.
Be sure to read through any governance and internal control memos provided by your auditor. These documents highlight significant control issues and suggestions for improvements, which are essential for maintaining regulatory compliance.
Finally, distribute the Summary Annual Report to participants as required. This report, prepared by your service provider, summarizes the year’s transaction activity.
If you need an audit for your 401(k) plan, learn more about our 6-phase 401(k) audit process or request a free 401(k) audit consultation below.
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