How to Prepare Your Company for a 401k Audit

As a company grows, it will experience many milestones, among which is its first 401k audit. As set by the United States Department of Labor (DOL), a 401k plan should be audited when it becomes a large plan. A large plan is considered to have at least 100 eligible participants on the first day of the plan year. Eligible participants include active, resigned, retired and deceased employees with beneficiaries, provided they all still receive benefits from the company.

Special note about the 80/120 Participant Rule

Small employee benefit plans may continue to waive a 401k audit, if the following conditions are met:

Beginning of Plan Year:

• Eligible participants is between 80 to 120 participants, and
• Small Plan Annual Report was filed with the IRS in the year prior

Companies are subject to a 401k audit once they hit the minimum head count. When Form 5500 is filed, a Schedule H should be filed as well. The Schedule H triggers the 401k audit requirement. Once this happens, auditors are tasked to closely examine a company’s fiduciary responsibility, their security’s internal controls, their plan’s compliance with the law, and their staff’s best practices. Though a 401k audit triggered by having 100 eligible participants at the beginning of the plan year should be no surprise, many companies are still unprepared for it. Don’t let your company be one of the unprepared. Here are some tips on how to prepare for a 401k audit:

• Gather plan-related documents: Auditors will ask for all relevant plan documents to check if your company is compliant and transparent. These documents include (but are not limited to):
  • Executed plan documents and amendments,
  • Executed board minutes and administrative committee minutes in relation to the plan,
  • Previous years’ financial statements, and
  • Copies of fidelity bond insurance cover.

Auditors will then check these documents for discrepancies. An investigation is warranted during a 401k audit if the total salary on the census is not reconciled with your payroll records, or if the fidelity bonds do not cover at least a tenth of the net plan assets.

• Plan Fiduciaries: A 401k plan should have a governing group responsible for complying, reporting, and recordkeeping. Members of this group are referred to as plan fiduciaries.

These members have fiduciary responsibility to exercise discretionary authority over plan management, administration, and assets. They are expected to convene regularly regarding the plan and keep meeting minutes for later use during a 401k audit. If your company has not designated company executives to be Plan Fiduciaries, do so now. Leverage executives from different departments to allow input from all aspects of operations.

• Confirm operational compliance: Although changes to a plan are allowed, they should be applied legally and recorded fully. Otherwise, the plan isn’t considered to be operating within the bounds established by the plan documents. Operating outside established boundaries results in compliance issues.

Key compliance checks include:

• Eligibility provisions – Are all eligible employees allowed to participate and non-eligible employees screened out?
  • What documents do you have in place that describe the eligibility procedures? Do you have a checklist that is utilized to act as a control?
• Compensation definition – Are your payroll records reconciled?
  • How often are you reconciling payroll? Is there a review and sign-off procedure established?
• Loan restrictions – Are all outstanding loans compliant?
  • What policies and procedures do you have in place? For example, are you testing for each loan to ensure that it does not exceed 50% of the vested balance, yet not greater than $50,000?
• Late deferral payments – Are you working with your payroll provider to ensure you make elected salary deferrals on time? What procedures do you have in place to ensure you make deposits on time?

Preparing for a 401k audit can be overwhelming and time consuming, but you are not alone. We at Ernst Wintter & Associates LLP offer 401k audit services tailored for small to mid-sized businesses.