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How companies can prepare for a 401(k) audit

04/05/2017  |  By: Meredith Douglas, CPA, Senior Manager, Audit

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As companies grow, often so do regulatory requirements. One important requirement that leaders of growing companies need to stay on top of is that they must have their 401(k) plans audited if they have more than 100 participants.

Of course, every company with a 401(k) plan must file a Form 5500 with the IRS, regardless of size. But with the July 31 filing deadline for that form arriving sooner than you think, it’s important for businesses to be familiar with audit rules to prevent a situation in which a company realizes a 401(k) audit is needed only after its Form 5500 is rejected. (It should be noted that companies can file for an automatic extension of the filing deadline to Oct. 15, so long as they do so before July 31.)

As with many government regulations, even the 100-participant threshold is not as straightforward as it sounds. The count of participants is as of the first day of the plan year, and employees are considered participants once they have met the plan’s eligibility requirements, regardless of whether they have actually enrolled in the program.

If your company has crossed that 100-participant threshold, the prospect of an audit may sound a little overwhelming. However, with proper preparation, the process can go smoothly. Here are 10 tips on getting ready for an audit.

  1. Gather all your plan documents and other agreements/documentation related to the plan. The auditor will need them, and you will save time on the back end by having the information ready from the beginning. Required documents will likely include:
    • Executed plan documents (including executed amendments)
    • Current year census
    • Copy of Form 5500 filed in previous year
    • Participant statement and trust reports
    • Plan sponsor financial statements
    • W-2 forms or other annual payroll registers
    • Loan documents for all participant loans
    • Certification report for the plan custodian
    • Discrimination tests
  2. Salary information on the census should match payroll records. If it doesn’t, determine why not.
  3. Make sure the value of your fidelity bond is at least 10 percent of the net asset value of the plan. The net asset value tends to increase each year, but many companies neglect to increase their bonds.
  4. Company leaders charged with governing the plan should have held a meeting in the past year, and kept minutes. That group typically includes leaders from finance, legal and HR. If that meeting hasn’t taken place, set it up.
  5. Check to be sure that any loans taken out by participants follow plan rules as defined in the plan document.
  6. Ensure that the correct definition of plan compensation as defined in the plan document is used when calculating employee contributions.
  7. Make sure that noneligible employees aren’t being allowed to participate in the plan, and that eligible employees aren’t being turned away from participating.
  8. Check to see that there is a good policy in place to ensure that employee contributions are being deposited in the plan on time.
  9. Make sure that hardship distributions are being offered and approved according to the plan document. Some plans are permitted to make distributions to participants facing an immediate and heavy financial need, but there are limitations on the amount that can distributed and acceptable uses for the money.
  10. Ensure that employer-matching and/or profit-sharing contributions are calculated and remitted as described in the plan document. One common error relates to eligibility requirements for employees to receive employer contributions. Reviewing length-of-service information and other eligibility provisions will help ensure that employer contributions are in compliance with the plan document.

One final note: Companies may reduce the cost of an audit by requesting that the auditor perform a limited-scope audit of financial statements, meaning they need not review investment information if it was prepared and certified by a qualified bank or similar institution, or by an insurance carrier. All other aspects of the audit remain the same.

Publication

The Tennessean