Best Practices for a Painless 401(k) Audit

Plan sponsors subject to an annual audit of their 401(k) benefit plan should always be as familiar as possible with compliance guidelines and requirements.

Whether you are preparing for your first time 401(k) plan audit or you have several plan audits under your belt, best practices for a painless plan audit can help you avoid common errors found in the audit as well as optimize audit efficiency.

ERISA Section 103(A)(3)(C) Audits

Plan sponsors who previously engaged in a limited-scope audit of their benefit plan will now be subject to Statement on Auditing Standards No. 136 (SAS 136), which replaces limited-scope audits effective for audits in periods ending on or after Dec. 15, 2021, with what is now known as Employee Retirement Income Security Act (ERISA) Section 103(a)(3)(c) audits. The new standard is meant to strengthen the integrity of the auditor’s report, with auditors now required to provide a detailed letter – subsequently, this means plan sponsors must disclose more information upfront to the auditor prior to the audit being performed, including providing proof of eligibility for the audit. Plan sponsors are also required to complete a draft of Form 5500 before engaging an auditor to perform the ERISA Section 103(a)(3)(c) audit.

The new standards were initially meant to take effect for audits of 401(k) plans with periods ending on or after Dec. 15, 2020; however, due to the disruption of the COVID-19 pandemic, the effective date was extended by one year.

Top 10 Errors Found in Audits of 401(k) Plans

As a plan sponsor, you have a fiduciary responsibility to properly handled your benefit plan administration. However, at times errors may occur – knowing the most common errors in 401(k) audits can help you know what to look for in advance and avoid potential tax penalties, plan disqualification or other personal liabilities.

The most common errors found in audits of 401(k) plans include the following:

1. Definition of compensation – Definition of compensation errors are common, occurring when compensation amounts are not properly included or excluded and do not align with the plan provisions. For example, bonuses may be a part of compensation, but some were excluded in practice.
2. Timely remittance of employee deferrals – Plan sponsors are responsible for timely contributing deferrals from participants to the plan trust. The Department of Labor (DOL) requires that these deferrals must be deposited as soon as administratively feasible, but no later than the fifteenth business day of the following month. Timely remittance of referrals will help you avoid operational mistakes and potential fines for correcting the mistake.
3. Eligibility – Plan administrators should be familiar with the specifics of eligibility requirements as outlined in the benefit plan in order to avoid accidentally excluding eligible employees from enrollment into the plan.
4. Administrative matters – Administrative and operational oversight can be a common cause for errors in the 401(k) plan, including failure to file Form 5500 on time, late or excessive contributions and following the plan document incorrectly.
5. Vesting – In order to keep its status as a qualified plan, your 401(k) plan must meet certain requirements for minimum vesting standards per your company’s plan document specifications.. Vesting records and schedules should be kept accurate to avoid receiving incorrect benefit amounts if the participant leaves the plan.
6. Forfeitures not being used – Based on timing specified in the benefit plan, forfeitures cannot be accumulated from one year to the next. If forfeitures are not used on a timely basis, unused amounts should be allocated as profit-sharing contributions to participants who would have been eligible in the year the forfeitures should have been used.
7. Distributions – Plan sponsors should ensure that those participants receiving distributions are eligible to receive the monies and any required minimum distributions (RMDs) are made in a timely manner.
8. Manual employer contribution calculation – In some cases, plan sponsors are manually calculating the employer-matching contribution through a formula on a spreadsheet. There is a higher likelihood of error in the manual nature of the calculation due to incorrect formulas or miskeying of information.
9. Participant elections – Employee deferral elections must be implemented correctly to avoid the deferral not being applied at all or in the incorrect amount. Plan sponsors should establish controls that ensure employee elections are monitored and requested changes are timely applied.
10. Understanding service provider contracts – To carry out the fiduciary responsibilities as a plan sponsor, many will enlist the help of third-party service providers to manage their benefit plan. However, be sure to fully understand the details in the service provider contracts, specifically which services are covered and relevant fees, which can help you avoid operational and administrative oversight of the plan.

Top 10 Tips for an Efficient Audit

1. Planning meetings should start now – If you haven’t already, set up a phone call or meeting with your auditor. Be sure to discuss timing, issues and any changes (amendments, service providers, etc.) to be fully prepared prior to the audit.
2. Be proactive – If you are not hearing regularly from your auditor, then reach out regarding the status of the audit proceedings.
3. Be prepared – Most auditors will send clients a prepared-by-client (PBC) list, so make sure you have your items ready as soon as possible for the list.
4. Set up recurring meetings – Be sure to set aside time for audit fieldwork, and also make sure to schedule meetings during that time. Any recurring meetings with your auditor should be honored and not canceled or rescheduled if at all possible.
5. Ask questions – If you do not understand why your auditor is requesting certain information, then ask away. It provides them an opportunity to clarify and explain how certain information is relevant to the audit.
6. Don’t procrastinate – Avoid procrastination when it comes to providing documentation and information to your auditor, scheduling field work and establishing recurring meetings.
7. Discuss any scheduling issues – Be upfront about scheduling of around the audit, including any vacations planned and relevant work deadlines.
8. – Your benefit plan auditor will likely make requests through your designated recordkeeper. Make sure to regularly check in with your recordkeeper to stay up to date on what your auditor needs or any requests they have for information.
9. Inform the auditor of issues as they arise during the year – Make it a regular practice to communicate with your auditor throughout the year. This will help you remain proactive in advance of the audit and give your auditor advance notice of any issues that could impact the audit.
10. Communication is key – Overcommunication is often an effective best practice with your plan auditor. Communicate regularly and often throughout the year.

Windham Brannon Can Help

Windham Brannon’s team of employee benefit plan audit professionals are well-versed in helping plan sponsors avoid common errors in their plans and implement best practices in anticipation of a plan audit. For more information about how to best prepare for your 401(k) benefit plan audit, contact your Windham Brannon advisor, or reach out to Anne Morris.