401k Plan Audits – Part 2: What Do Auditors Review?

Posted by Jessica Rizzo on Mar 30, 2021 9:28:57 AM
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When a business reaches a certain number of eligible participants for their 401(k) Plan, federal law requires an independent audit of the Plan. While larger companies may be familiar with this process, many small business owners may find themselves in uncharted territory the first time their number of eligible participants increases above the threshold amount. In this second blog in our 3-part series, we’ll discuss what auditors review during a 401(k) Plan audit.

The first two aspects that auditors will look at during a 401k Plan audit are documentation and compliance. Analysis will be conducted on certain areas within the Plan to ensure that it is operating within the guidelines of the Plan-related documents, as well as following specific Department of Labor and IRS regulations. Some of the audit areas tested include participant data, eligibility, forfeitures, investment income allocations, contributions, timeliness of employee contributions, employee deferrals, and benefit payments. Any deviations or errors found will be communicated to management as they appear. Once the auditors have completed the testing, the financial statements, disclosures, and Form 5500 are reviewed to be sure that financial information is being correctly reported.

Common Audit Fails

The Department of Labor is very strict when it comes to audits and they have noted high deficiencies in the below areas:

  • Failure to have documentation or testing related to audit areas
  • Inappropriate reliance or failure to understand requirements of limited scope engagements
  • Failure to include required supplementary schedules relating to DOL and ERISA
  • Missing disclosures that are required on financial statements

The two most common errors we see are Plan documentation failures and Plan operation error.

What is a plan documentation failure?

A Plan documentation failure occurs when the Plan document is not created in accordance with government regulations. This failure can be a result of unintentional errors when the document was originally written, or can occur when amendments are made to the Plan and are not completed in a timely manner. When a Plan document failure is uncovered, it is required that the Plan documents be modified and that a correction is issued to Plan participants. This will only be completed if the correction is favorable to the Plan participant.

What is a plan operational error?

A Plan operational error arises under two conditions: either a transaction isn’t in accordance with the Plan document or participants instructions; or the Plan fails the non-discrimination test and the timely corrective action isn’t taken. Common operational errors include:

  • Failure to admit participants into the Plan when they become eligible
  • Incorrect contribution amounts made to the participant’s accounts
  • Incorrect vesting percentages being used when distributions are made

Stay tuned for the final blog post in this series, which will compare limited scope audits to full scope audits. You can also read the first blog post in the series, “Does Your Company Require a 401(k) Plan Audit?”.  If you have any questions about 401(k) Plan audits, leave a comment below, or feel free to reach out to me directly, I’m happy to help!

Topics: Accounting, Business Advisory, Employee Benefits