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What Every Employer Should Know About 401(k) Plan Audits

Posted by Aaron Harris, CPA on Mar 9, 2020 9:00:00 AM

As part of their total compensation package, 401(k) plans offer your employees the ability to save for retirement, receive matching employer contributions and potentially reduce their tax liability. Every dollar you contribute to employee benefit plans also provides ongoing tax benefits to you and your business. Along with these benefits comes the responsibility of an annual 401(k) audit. At a time when the Department of Labor (DOL) has increased the scrutiny of employee benefit plans, it is critical for businesses to understand federal audit requirements. The following answers to key questions will provide you with an overview of essential information.  

Why is the 401(k) plan audit necessary?

The Employee Retirement Income Security Act (ERISA) mandates the audit of 401(k) plans. Simply put, the purpose of a 401(k) audit is to ensure that you – and third-party administrators – are running the plan correctly and in compliance with Department of Labor (DOL) and IRS requirements. If you have 100 eligible employees on the first day of the plan year, an audit is required. Following that year, you must have your plan audited annually unless the number of eligible participants falls below 100. Keep in mind that “eligible” is the key word—even if an employee decided not to participate in your 401(k) plan, they are still considered an eligible participant.

What is the process for employee benefit plan audits?

The Goldin Peiser & Peiser 401(k) plan audit process uses a risk-based approach that identifies potential areas of risk. For example, our team searches for any misstatements of your plan’s financial statements and reporting obligations under ERISA. We work closely with your employee benefits leader(s) to complete questionnaires relating to internal controls, operations and accounting processes. We will also acquire and review information from the plan’s third-party administrator to ensure its completeness and accuracy.

Our objective is to gain an in-depth understanding of these processes to ensure a thorough, efficient and effective audit. After the documentation is analyzed to ensure it meets compliance requirements, your auditor will check to make sure your financial statements, disclosures and Form 5500 are correct. Remember, third-party administrators of 401(k) plans are accountable for ensuring all proper internal controls are in place to meet with federal requirements.

What should I look for in a 401(k) plan auditor?

When you are required to have an employee benefit plan audit, one of your most important actions is to hire an independent, qualified public accountant. Your benefits plan audit team should have extensive experience in conducting audits of 401(k) benefits plans. Ask if the auditor is a member of the AICPA’s Employee Benefit Audit Quality Center (EBPAQC). The EBPAQC helps CPAs with the challenges of performing the highest-quality plan audits.

Expect partner-level involvement in the engagement and ongoing, open communication between the audit team and your benefits administrator. As part of the engagement letter, audit fees should be transparent with no surprises.

Related Blog: Selection and Evaluation of a CPA Firm for Your 401(k) Audit

What are the penalties for noncompliance?

The DOL has the right to reject plan filings and assess penalties on plan administrators for deficient filings. Under its adjustments for 2020, the maximum DOL penalty for failure to file an annual Form 5500 has increased from $2,194 to $2,233 per day that the filing is late.

Additional penalties regarding 401(k) are as follows:

  • For plans with automatic contribution arrangements, penalties for failure to provide the required ERISA § 514(e) preemption notice to participants increase from $1,736 to $1,767 per day
  • Penalties for failing to provide blackout notices (required in advance of certain periods during which participants may not change their investments or take loans or distributions) or notices of diversification rights increase from $139 to $141 per day 
  • The maximum penalty for failure to comply with the ERISA § 209(b) recordkeeping and reporting requirements increases from $30 to $31 per employee

As you can see, it’s simply not worth the risk for your business to be in violation of DOL and ERISA requirements. Audits of your plan will help identify any weak spots in your internal controls that may affect your company’s ability to continue offering this valuable employee attraction and retention benefit.

If you have questions about any type of employee benefit audits, our Employee Benefit Plan Services Group can help. For more information, contact Aaron Harris at 972-818-5300.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

Topics: Business, Employee Benefit Plan Audits, 401(k) Plan Audit