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December 16, 2022

401(k) Audit CPA Success Show Podcast: Key Tips to Keep Your First 401(k) Plan Audit on Track

Reaching your first 401(k) audit as an organization is a milestone for any business, but one not everyone is fully prepared for. Director + 401(k) Audit Kim Moore and Manager + 401(k) Audit Karen Hill discussed a variety of strategies for 401(k) plan sponsors or administrators to avoid delays, create a more efficient process and set the path for future success down the road.  

Key Takeaways: 

  • First time 401(k) audits typically take longer to complete than subsequent annual audits 
  • Picking an auditor is an important part of the process and the decision should be made early before their availability fills up  
  • Take the time to schedule out your audit before you sign an engagement letter to verify that the timetable is workable for the auditor 
  • Keep in mind that some documents will take time to put together or only be available at a certain point in the year when working with your auditor on the schedule 
  • Delays can be caused by failure to respond quickly to document requests from your auditor or from submitting the wrong documents due to a misunderstanding, so it’s important to keep a line of communication open with the auditor to avoid such costly and unnecessary mistakes 

Managing the 401(k) audit process for the first time can feel nerve wracking, but with proper preparation your organization can avoid delays that could cause you to file late and pay penalties. The key to a good 401(k) audit is finding an auditor with the knowledge to guide you through the process. 

Selecting a 401(k) Auditor 

Consider starting your 401(k) auditor search by reaching out to auditors who have worked on other audits for you and ask if they perform 401(k) audits. If they don’t, they will likely suggest a firm that does. If they answer yes, but you’re uncertain about their qualifications, ask some questions to help you understand their experience level. Questions may include, “do you do 401(k) audit plans, how many audits have you done?” Google can also be a valuable resource to find leads on potential auditors.  

Scheduling Your 401(k) Audit 

The first 401(k) audit typically takes longer than average 401(k) audits, so that must be accounted for during the planning process. Before the audit officially begins, and before the engagement letter is signed, discuss with your auditor when you’d like your audit completed and when certain documents will become available to send the auditor.  

Be aware that auditors are often working on other audits at the same time as yours. Replying to their requests as soon as possible keeps you and your company at the top of the queue rather than set aside to focus on other projects.  

If you use a third-party administrator or service provider, you’ll need to coordinate with them to ensure the documents or reports you’ll need from them will be ready in time for the auditor. If a report won’t be ready until April, but you’re attempting to complete the audit by March, that obviously presents a problem since your auditor will be unable to create those documents themselves.  

It should also be noted that auditors won’t be able to pull the documents they need from your service provider’s website without proper authorization. They will need to work with someone within your organization to obtain access to the data they require. Consider making a list of people you think may need to be involved and cross-check their schedules against the audit’s: is a key staff member going on vacation during a critical week? Are there any deadlines that coincide with holidays where multiple people will be unavailable?   

Gather Required Documents 

Now that the auditor’s been selected and a tentative timetable has been agreed to, it’s time to start consolidating documents that will be necessary for the audit. This will include plan documents like the summary plan description, the basic plan document, the adoption agreement and the opinion letter from the IRS.  

If you’ve never received an opinion letter from the IRS, it may have been sent to you by your service provider, an attorney or another third-party administrator. If you didn’t receive this letter, reach out to the relevant party to track it down.  

Any amendments should be included in the plan document. A plan census, used to run discrimination testing, should also be provided to the auditor, along with your payroll year-end report. While it may be tempting to assume that these reports only need to cover employees in the plan, that’s not the case. The entire company must be included, including subsidiaries if it’s a larger company.  

Your auditor should give you something called a Provided by Client (PBC) list containing the documents and questions of all the different things they’ll need to start the audit. Keep in mind that each request made by the auditor will likely be followed up with an additional request for even more information. Stay alert for follow up requests and address them quickly to ensure your auditor stays focused on your audit.  

Engagement Letter 

The engagement letter is essentially a contract between your organization and the auditor. It should include the fee structure for the audit, if the auditor will be coming on site, the timeline as well as any other miscellaneous expenses, such as travel reimbursement. There may be language included to bill you for more if certain errors are detected which is why a careful review is wise. If there’s anything you don’t understand, don’t hesitate to reach out to your auditor with any questions.  

Additional Information to Share with Your Auditor 

Discuss any changes to your company, especially if it directly impacts the plan, with your auditor. If you’ve had amendments or a restatement, that should be passed along to the auditor. Changing service providers should also be reported to the auditor as soon as possible. Changes in personnel may also be of interest to your auditor, particularly if it’s someone the auditor worked with or someone they will be working with moving forward.  

Make notes throughout the year to keep track of these changes. Changes on this scale could require additional procedures for the auditor to complete, which could result in additional charges or changes to the fee. Speak with your auditor about how often they’ll meet with you to update you on the status of the audit. Is once a week too often and once a month is fine? Would you prefer an actual meeting or is an e-mail status update adequate?  

Overall, one of the most important pieces of advice is to keep in contact with your auditor to keep the process moving forward as smoothly as possible. If you have questions about a request for a document and you’re unsure of what to send, ask your auditor to provide some clarification. Once the audit is complete, consider asking your auditor for feedback for you to analyze and improve your strategy and process for the next year. 

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.  

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

Watch the 401(k) Audit CPA Success Show: Key Tips To Keep Your First 401(K) Plan Audit On Track on YouTubeand subscribe on Spotify or Apple Podcasts and let us know what you think by rating and reviewing. 

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