The 5 Ws of a 401(k) Plan Audit

Posted By: Stacey Snyder, CPA, QKA, TGPC

If you’ve just been informed that your 401(k) plan needs an audit, you probably have many questions if you have never been through a 401(k) audit. Hopefully by answering the five Ws (Who? What? When? Where? Why?), we’ll cover most of your questions.

WHO? – Who Audits a 401(k) Plan?

The audit of your 401(k) plan must be performed by an independent qualified public accountant. While any independent CPA firm can perform the audit, it is important to evaluate a firm’s qualifications prior to engaging them to perform your audit. Audits of 401(k) plans differ from financial statement audits since they require specialized knowledge of the applicable rules and regulations related to 401(k) plans that tie into the required audit procedures. Hiring a firm that lacks the appropriate knowledge could result in a deficient audit and create unexpected costs and inconveniences if the Department of Labor (DOL) requires you to have your plan re-audited. Therefore, you should look to hire a firm with a niche that specializes in retirement plan audits.

Some questions to ask when selecting your auditor include: How many plans does the firm audit? What’s the experience of the audit team? Do the auditors have certifications and credentials? These questions and other key questions are explained in further detail in our blog How Can Plan Sponsors Evaluate Prospective Auditors?

WHAT? – What is Audited?

The purpose of a 401(k) plan audit is to verify the plan is operating in compliance with applicable rules and regulations and in accordance with the provisions of the plan document. Therefore, you will need to provide your auditor with a copy of your plan document and related amendments, if any, so they can determine which provisions have been adopted by the plan, and the applicable testing procedures to apply to each provision. Generally, the following plan provisions are tested:

  • Investments – Unless a limited scope audit is requested, testing of the fair market values as of the last day of the plan year, and earnings and transactions during the year will be performed.
  • Loans – Testing is performed to verify loans were issued in accordance with plan provisions and applicable regulatory limits. · Employee Contributions – Testing is performed to verify timeliness of deposits, that participant elections are followed, and that amounts withheld from participants’ pay is deposited completely into the plan.
  • Employer Contributions – Testing is performed to verify contributions are allocated in accordance with the formula defined by the plan and do not exceed regulatory limits.
  • Distributions – Testing is performed to verify eligibility of the distributions, that the amounts distributed are not in excess of plan provisions, that forfeited amounts are determined in accordance with plan provisions, and that distributions were made in accordance with participant elections.
  • Rollover Contributions – Testing is performed to ensure the contribution was received from an eligible source and in accordance with the plan document, and that the amount received was deposited into the participant’s account completely and in accordance with the participant’s elections.

To complete all the required testing, your auditor will need a variety of reports and supporting documents. The information request list you receive from the auditor will include most, if not all, of the items noted on our sample information request form: Sample Information Request Form. While the list appears to be long, the recordkeeper generally provides an audit package which contains a majority of the necessary reports. Additionally, if you provide the auditor with read-only webstation access, a number of items are usually available for download directly from the site. Payroll reports, personnel file information, and any requests not submitted to the recordkeeper will have to be provided by you, the plan sponsor.

In addition, if the plan was previously a small plan not subject to the audit requirement, beginning balance testing will also be required. To complete beginning balance testing, the auditor will need historical data for as many years as possible, possibly from inception of the plan. This historical data includes W-3s, payroll reports, census reports, account balance reports, compliance testing, etc. Beginning balance testing is discussed in more detail in our blog Auditors’ Tests of Beginning Balances When a Small Plan Becomes a Large Plan.

Once the auditor completes testing and assesses the results of procedures performed, they may issue an opinion on the completeness and accuracy of the plan’s financial statements. There are four types of reports that may be issued, which are described in our blog Understanding Independent Qualified Plan Auditor Opinions on Financial Statements.

WHEN? – When is the Audit Due?

Since the audit is required to be attached to the plan’s Form 5500, the audit is due by the filing deadline of the Form 5500. The Form 5500 is due the last day of the seventh month following the plan’s year end, with an optional two-and-a-half-month extension. For a plan with a December 31 year end, the deadline is July 31 of the following year, or October 15, if an extension is filed.

WHERE? – Where is the Audit Performed?

Audits of 401(k) plans can sometimes be performed remotely. Since reports from the recordkeeper and third-party administrator are already in electronic format, they are provided to the auditor electronically. Any information the auditor needs from you may be sent electronically or collected in person, based on your preference. Some firms aggressively market the efficiency and cost-effectiveness of their 100% remote audit capabilities at industry seminars. It is important to select your 401(k) plan auditor based on qualifications, not price.

WHY? – Why Does the Plan Need an Audit?

Plans that have 100 or more eligible participants at the beginning of the plan year are required to undergo audits annually. However, an exception to the requirement is the 80-120 rule. In short, if the plan was previously a small plan (fewer than 100 participants at the beginning of a prior plan year), an audit is not required until the plan reaches 120 participants on the first day of a plan year. You can read about this rule in more detail in our blog I don’t want to grow up, I want to be a small plan!

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