Preparing for Your First 401k Plan Audit

Denver companies with 401k or other benefit plans that have grown beyond 100 eligible participants are often faced with new compliance requirements. One of the most important changes that occurs when the 100 participants threshold is crossed is the annual plan audit requirement. According to the Employee Income Security Act (ERISA), an audit is required to ensure proper policies, processes and procedures are in place and being followed. In other words, they ensure plan operations are being executed according to prescribed regulations and are designed to protect the interests of plan participants. For a plan sponsor, the first audit can be a stressful time due to their lack of experience with the audit process. Issues such as auditor selection, communication, documentation preparation and process management are just a few trigger points for many.  While it’s normal to experience some anxiety, there are preparation steps you can take to make the overall experience less challenging. To help clients, prospects and others prepare for their first 401k plan audit, Hanson & Co has provided a summary list of key considerations below.

Plan Audit Preparation Tips

  • Selecting a Plan Auditor – There are many audit firms in Denver that can conduct a 401k plan audit, but it’s important to find one with the relevant experience who can provide the highest level of service. In 2015, the Department of Labor published a study on the quality of benefit plan audits and found that nearly 40% of audits had major issues that could result in the rejection of audit filings. For this reason, it’s essential to work with an audit firm that has experience in and focuses on conducting benefit plan audits. The American Institute of Certified Public Accountants (AICPA) has provided a list of best practices for identifying a quality plan auditor which can help guide your search.

  • Compile Essential Documentation – Your 401k auditor will need access to various documents related to your benefit plan. For this reason, it’s best if you can compile as many of the items as possible prior to the start of the audit. In our experience you will need to obtain copies of the summary plan description, plan amendments agreements with service providers, documentation of the plan’s internal controls, payroll records, list of contributions by period, employee census, fidelity bond policy, plan investment policies and copies of prior IRS Form 5500 filings. Since you are new to the process it’s a good idea to speak with your auditor about the documents that need to be made available. The more information you can provide when the audit starts the fewer requests for additional information will be made during the engagement.

  • Frequent Auditor Communication – It’s important to communicate early and often with your plan auditor. Not only do you want to get information on the audit timeline, key benchmarks, deadlines and delivery dates, but also information such as what documentation will be needed for review. Beyond this, it’s important to discuss audit timing, how many auditors will be on site and how long they will need to complete relevant fieldwork. This will help set expectations and ensure available internal resources are available to answer questions, address issues and respond to requests.

  • Team Management – It’s important to have a plan in place to manage various members of the team. This extends beyond internal resources to plan service providers, custodians and even your third-party administrator. Make sure that everyone understands what is expected of them, what information they need to provide, related responsibilities and associated timelines. Setting clear and concise expectations upfront will increase the likelihood all parties will meet your expectations and minimize the chances for issues. Be sure to schedule follow-up meetings as needed to keep the team updated of changes and how it will impact them.

  • Process Review – Once the audit report has been issued, we recommend meeting with your team to discuss the lessons learned. If there were issued identify what caused them and what steps can be taken in the future to eliminate the likelihood of a repeat performance. Be sure to keep it positive and identify the things that worked and what made it successful. The more you can learn from the initial experience the fewer issues you will have in subsequent audits.

Contact Us

The first-year plan audit will certainly be filled with challenges, opportunities and learning experiences. The key is to be proactive and open with your team and auditor to avoid as many issues and unwelcome surprises as possible. If you are looking for assistance with your first plan audit or seeking a new audit experience, Hanson & CO can help! We provide plan audit services to companies with various size plans across Denver. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon!

ConsultingJeremiah Wolcott