Written by Ashley Caldwell, CPA

A retirement plan is a great benefit to provide for your employees in a world where there is much uncertainty surrounding Social Security. According to the Social Security Administration’s Chief Actuary, “program cost [is expected] to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits.” 1 Without modifications made to the program as it is today, reductions in benefits may well be on the horizon over the next 20 years. Therefore, many people see retirement plans as a necessary benefit for their employer to have.

If your company does offer a retirement plan, there are many rules and regulations that must be followed to comply with the Employee Retirement Income Security Act of 1974 (ERISA). One of these rules is that you must file a Form 5500. As a plan sponsor, you may wonder, at what point do I need an audit for our 401k plan? Is the plan in compliance? Will the plan be able to meet future needs?

There may be a host of questions that are keeping you up at night. Especially since a plan sponsor’s fiduciary responsibility is such an important role. It is up to the plan sponsor to make sure that the plan is meeting its goals, can provide funds for participants now and in the future and is staying in compliance.

First, what companies are required to have an audit for their retirement plan? All 401k plans that file as a “large” plan on Form 5500 are required to attach an audit performed by an independent, qualified, external firm. A company is considered to have a large plan if it has over 100 “eligible” participants as of the first day of the plan year. Notice that we emphasize the word “eligible.” An eligible employee is an employee that has met the criteria to participate in the company’s retirement plan whether they choose to participate or not. So, eligible participants would include:

  1. former employees who still have a balance in their account;
  2. current employees who could participate but choose not to; and
  3. employees who meet the criteria and are actively participating in the plan.

It is critical that as the plan sponsor, you are aware of each employee’s eligibility in order to identify your company’s status to correctly complete the Form 5500.

Now, just to make things more interesting, there is an “80-120 participant” rule. This rule applies to companies who filed as a “small” plan in a previous year but have grown and may now be considered a large plan. However, if the number of eligible participants is still under 120 and the company filed as a small plan in the previous year, it can avoid the external audit requirement. Once that magic number reaches 121 by the first day of a plan year though, the company must get an external audit performed. Furthermore, once a company undergoes an external audit, the number of eligible employees’ threshold drops back down to 100 for the external audit requirement for all future years.

Once you’ve determined that you need an independent, external audit performed, who do you choose? Because the experience of a firm is crucial to performing an accurate and efficient audit, it is a good idea to choose a firm that performs multiple retirement plan audits and who will take the time to understand your company’s unique eligibility requirements and situation.  According to the DOL,

“One of the most common reasons for deficient accountants’ reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans.”2

A thorough external audit provided by experienced auditors can provide you with insight into the control environment of your plan’s processes and identify prohibited transactions as well as operational errors or inconsistencies. Once these items are identified, you should be able to take steps to correct or remedy those errors which can help you successfully manage and administer your plan.

If you must get an external audit, here are a few things that may help you prepare so that your audit goes as smoothly and painless as possible:

  • Contact the auditor approximately three months before your audit is scheduled to occur.
    1. You can confirm scheduling, fees and any issues or concerns that have arisen during the year.
    2. During this timeframe, you and your auditor can go over prior year audits to review notes, suggestions, etc. This will also give the auditors time to consider your unique aspects and tailor their current year approach to identify all areas to be covered.
  • Contact your custodian.
    1. The auditors will need access to the custodian’s information. This will allow for the time needed to grant access to files, etc.
    2. In addition, this will also allow the auditors time to begin making their sample selections.
  • Compile all necessary documents.
    1. The auditors can provide you with a list of information they will need in order to perform the audit. The sooner this information is prepared and sent to the auditor the better. This will give your auditors the ability to complete as many steps as possible before they physically arrive at your office.
    2. Having the documents beforehand will also allow your auditors time to plan for questions they have while in your office thus promoting a more efficient use of the time allotted for fieldwork and less intrusions into your staff’s time.
  • Keep in contact with the auditor during and after the audit fieldwork.
    1. Responding to open items will help the audit progress quickly and efficiently.
    2. Staying in contact will also minimize any surprises. However, the auditor should consistently remain in contact with you during the entire process and keep you apprised of any issues or questions. There should never be surprises when an audit report is issued.
    3. Make notes of what went well, what might be improved, etc. for next year.

Overall, an audit is not something to be dreaded or feared. It is simply a mechanism to assist you in complying with DOL regulations. Once the audit is complete, the information can be used to help strengthen internal controls, correct areas of noncompliance, improve processes and help you gain a greater appreciation for your role as the plan sponsor.

If you have any questions regarding this information or about your company’s specific audit requirements, please reach out to one of our employee benefit plan professionals. We are here and ready to help you navigate the ins and outs of employee benefit plan rules and regulations.

1The Future Financial Status of the Social Security Program

2Selecting an Auditor for Your Employee Benefit Plan

Additional Information:

DOL website

Meeting Your Fiduciary Responsibilities

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