If you’ve recently learned that your company’s 401(k) plan requires an audit, you might be feeling uncertain about what lies ahead. As your organization’s retirement plan reaches the threshold of 120 or participants with account balances, an annual audit becomes a regulatory requirement under the Employee Retirement Income Security Act (ERISA). Understanding the audit process can help you prepare effectively and move through this experience with confidence.
Understanding the 401(k) Audit Requirement
The Department of Labor mandates that employee benefit plans with 120 or more participants with account balances at the beginning of the plan year undergo an annual independent audit. This requirement exists to protect plan participants by providing an objective assessment of the plan’s financial statements and compliance with ERISA regulations. Your first 401(k) audit represents a significant milestone in your company’s growth, and while it may seem overwhelming initially, it’s a manageable process when you know what to expect.
Pre-Audit Planning and Preparation
Your journey begins several months before the actual audit fieldwork. The audit firm will send you a detailed document request list, often called a Prepared by Client (PBC) list. This comprehensive checklist outlines all the financial records, plan documents, and supporting materials your auditors will need to review.
Key Documents You’ll Need to Gather
- Trust report from your recordkeeper
- Participant data files from your recordkeeper
- Payroll records
- Employer contribution calculations
- Loan documentation
- Plan documents and amendments
Your plan administrator or third-party administrator (TPA) will play a crucial role in providing participant census information and contribution testing results. Many companies find it helpful to designate a single point of contact who coordinates between the audit team, recordkeeper, TPA, and internal stakeholders.
Additionally, for a first time 401(k) audit, your auditor is required perform a look back to the three years preceding the year of audit. As such, it is imperative that you retain records from and/or access to your recordkeeper and payroll files from prior periods.
The Audit Fieldwork Process
During the fieldwork phase, which typically spans several weeks, your auditors will conduct various procedures to test the accuracy of your plan’s financial statements and assess compliance with plan provisions and regulatory requirements.
What Auditors Will Review
Key audit focus areas include, but are not limited to:
- Accuracy of participant deferrals
- Accuracy of employer contributions (if applicable)
- Employee eligibility and enrollment procedures
- Timely deposit of participant contributions
- Testing participant rollovers, loans and distributions
- Review of your Form 5500
Your auditors will request meetings with key personnel, including your HR director, payroll manager, and finance team members. These conversations help auditors understand your plan operations, internal controls, and any changes that occurred during the plan year.
Common Audit Findings and How to Address Them
During your first audit, you may encounter findings that require correction. Understanding common issues helps you address them proactively.
Typical First-Audit Issues
- Late payroll contribution deposits: If your company has made late deposits, you’ll need to calculate and deposit lost earnings using the Department of Labor’s online calculator and may need to file a Voluntary Fiduciary Correction Program (VFCP) application.
- Loan administration errors: Incorrect loan amounts, improper repayment frequencies, or loans that exceed regulatory limits represent common concerns.
- Eligibility and enrollment mistakes: Companies sometimes fail to enroll eligible employees in a timely manner or incorrectly exclude certain employee classifications.
- Auto enroll: employees are often times not auto enrolled when eligible.
- Missing or incomplete plan documentation: Outdated plan documents or adoption agreements that don’t reflect current plan operations frequently surface during first-time audits.
While these findings may seem concerning, they’re correctable issues that your auditors will help you address and prevent in future years.
Working with Your Recordkeeper and TPA
Your relationship with your recordkeeper and TPA becomes particularly important during the audit. These service providers maintain critical plan data and financial records that your auditors need to review.
Your recordkeeper should provide a compliance testing package that demonstrates your plan passed required nondiscrimination tests, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. Your TPA typically prepares Form 5500 and supporting schedules, which your auditors will review for consistency with the financial statements. Clear communication between your audit team and service providers helps prevent delays and misunderstandings.
The Final Deliverables and Next Steps
As your audit concludes, you’ll receive several important deliverables.
What You’ll Receive
- Auditors’ report: Provides an opinion on whether your plan’s financial statements are present fairly, in all material respects
- Audited financial statements: Required to be included with your Form 5500 filing
- Management letter (if applicable): Outlines any findings and recommendations for improvement
The auditors’ report and audited financial statements must be filed with the Department of Labor by the plan’s Form 5500 deadline, which falls on the last day of the seventh month after the plan year ends. For calendar year plans, this means July 31, although you can request an extension to October 15 if needed.
BPM’s Employee Benefit Plan Audit Services
BPM’s employee benefit plan audit team brings deep understanding of the unique challenges facing plan sponsors during their first audit experience. Our professionals work closely with you to explain the process, anticipate potential issues, and develop practical solutions that strengthen your plan administration.
If you’re approaching your first 401(k) audit and want to work with a team who will guide you through the process in a collaborative manner and provide value add feedback regarding your plan operations, we’re here to help.
