How to Fix 401(k) Audit Deficiencies (What Happens Next)

Kim Moore

As your auditor finishes the testing for your audit, they may identify items that they believe are incorrect or incomplete. They should discuss these items with you to make sure you understand the issues and there is no additional information that could be provided to resolve the issue.

Audit deficiencies are not uncommon, but how you respond can determine whether the issue remains isolated or becomes an ongoing compliance risk.

Once you have completed these discussions and have identified the errors made and the cause for these errors, you should review your procedures and revise them as necessary to ensure the issues do not recur in the future. You may need to take action to correct the specific items noted, as well.

If you’re wondering how to fix 401(k) audit issues, the most effective approach is to confirm the finding, correct what’s required, and update procedures so the issue doesn’t recur.
 

What to Do After a 401(k) Audit Deficiency

  • Confirm the issue and gather supporting documentation

  • Understand the root cause (process gap vs. one-time exception)

  • Determine whether a correction is required (and document it)

  • Update internal procedures and assign ownership

  • Keep records of corrective actions for future audits

If you’re preparing for the next audit cycle, start with a structured 401(k) audit checklist to confirm your documentation and procedures are aligned.

Internal Control Letter

The auditor should provide at the end of the audit a document called an “Internal Control Letter” or set of “Management Letter Comments”. The final agreed issues should be included in this communication. Management should review the document with the staff that administer the 401(k) plan, as well as those with oversight responsibility to ensure everyone understands the implications of the errors if not corrected and the new procedures that will be implemented going forward.

These findings are intended to improve plan operations and are often revisited in future audits to confirm corrective actions were implemented.

If you’re trying to determine how to fix audit issues, this letter is your starting point for prioritizing what needs to change and who owns the change.

Please remember that one of the main purposes of the audit is to identify processing errors that occurred. 

Blaming the auditor for finding deficiencies defeats the intended purpose of the audit.  Listen to what the auditors have to say and don’t hesitate to question their findings if you believe they are not correct.

However, if the auditor can provide specific compliance requirements such as IRS or Department of Labor regulations, or ERISA components that support their arguments, make sure you pay attention to their logic.

Ignoring their comments could subject the plan, plan sponsor (company offering the 401(k) Plan to employees) and/or you as the plan trustee/administrator to fines, penalties and even criminal action. Unaddressed deficiencies may also be flagged again in future audits, increasing scrutiny and potentially leading to more significant corrective actions.

Some deficiencies, if not addressed, can lead the Plan to be deemed “not qualified” which can impose tax penalties on all participants.

Once a deficiency is identified, the focus should shift from understanding the issue to correcting it and updating internal processes.

Your Auditor Can Help You To Work through Deficiencies

Work with your auditors to understand the work they completed, why they believe an item is an issue and what is the best and most efficient way to correct any errors noted. Wouldn’t you rather have an issue identified by your auditor so you can take proactive corrective action versus having the issue identified by a regulator?

That could cause additional administrative time and incur fines and penalties, or worse yet, have the error identified by an employee which could lead to legal action against the plan, plan sponsor, or the plan trustee/administrator. Working with an auditor who clearly explains findings and corrective actions can make a significant difference in how smoothly your plan operates year over year.

Choosing a 401(k) audit firm that provides clear guidance on deficiencies and corrective actions can help reduce repeat issues and improve overall plan compliance. If you’re evaluating support for your next audit cycle, learn more about Anders 401(k) audit services.

To get started, request a free 401(k) audit consultation below.

 
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