401(k) Audit Requirements Checklist: Ensuring Compliance and Avoiding Penalties

Introduction

As a plan sponsor, it's your responsibility to ensure that your 401(k) plan is operating in compliance with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). An essential part of this process is undergoing regular 401(k) audits. To help you navigate this complex landscape, we've created a comprehensive 401(k) audit requirements checklist. This long-form article (900-1200 words) will guide you through the necessary steps to ensure compliance and avoid penalties.

1.Determine Audit Triggers

Not all 401(k) plans require an audit. Generally, plans with 100 or more eligible participants at the beginning of the plan year must be audited. However, there are exceptions and special rules for frozen plans and plans maintained by governmental and church employers.

2.Select a Qualified Auditor

Choose an independent qualified public accountant (IQPA) who is registered with the American Institute of Certified Public Accountants (AICPA). The auditor should have experience in auditing employee benefit plans, specifically 401(k) plans.

3.Pre-Audit Preparation

Gather and organize the necessary documents, including:

• Plan documents and amendments
• Summary plan descriptions (SPDs) and summaries of material modifications (SMMs)
• Financial statements and records
• Participant data (demographic, compensation, and contribution information)
• Loan and distribution records
• Service provider agreements and records
• Fiduciary activity documentation

4.Understanding Audit Scope

The audit focuses on two primary areas: financial statements and compliance. The financial statement audit tests the accuracy and completeness of plan financial information, while the compliance audit evaluates whether the plan operates according to the plan document and applicable laws.

5.Financial Statement Audit Requirements

• Financial statement audit requirements include:
• Testing the proper classification and valuation of plan assets
• Verifying contributions, benefit payments, and other transactions
• Ensuring proper accounting for plan expenses and income
• Reviewing internal controls and reporting systems
• Evaluating compliance with generally accepted accounting principles (GAAP)

6.Compliance Audit Requirements

Compliance audit requirements include:

• Testing participant eligibility and vesting
• Verifying proper allocation of contributions, forfeitures, and earnings
• Examining compliance with plan loan and distribution policies
• Ensuring timely deposit of participant contributions and loan repayments
• Reviewing compliance with IRS and Department of Labor (DOL) reporting requirements
  Checking for prohibited transactions

7.Communicate with the Auditor

Maintain open communication with the auditor throughout the process. Provide access to requested documents and information, and address any questions or concerns promptly.

8.Review Audit Findings

Review the auditor's findings and recommendations carefully. Address any issues identified, and implement necessary changes to maintain compliance.

9.Form 5500 Filing

After the audit, prepare and file Form 5500 with the DOL and IRS. The form should include the auditor's report, financial statements, and required schedules. Be sure to submit the form by the applicable deadline (July 31, with a two-and-a-half-month extension available).

10.Maintain Documentation

Retain all audit-related documentation for at least six years from the end of the plan year to which the documents relate, as required by the DOL.

Conclusion :

Undergoing a 401(k) audit can be a complex and time-consuming process, but it's crucial for ensuring compliance and avoiding penalties. By following this 401(k) audit requirements checklist, plan sponsors can streamline the process and maintain the integrity of their 401(k) plans. Regular audits, coupled with ongoing monitoring and maintenance, help protect the interests of plan participants and promote long-term success for the organization.