How to Best Prepare for Your Company’s 401(k) Plan Audit

Preparing for a 401(k) plan audit might seem daunting, but with proper planning and organization, it can be a smooth and productive process. Whether this is your first audit or a routine one, following these steps will help you meet compliance requirements and ensure your audit runs efficiently.

1. Understand the Purpose of the Audit

A 401(k) audit ensures your retirement plan complies with the Employee Retirement Income Security Act (ERISA) and IRS regulations. The auditor will evaluate the plan’s financial statements, operations, and internal controls to verify compliance and accuracy. Knowing the purpose of the audit can help you focus on what matters most.

2. Review Your Plan’s Requirements

Determine if your company’s 401(k) plan requires an audit. Generally, plans with 100 or more eligible participants must undergo an annual audit. However, the “80-120 rule” allows some plans near the 100-participant threshold to skip an audit under certain conditions. Clarify your obligations before proceeding.

3. Organize Plan Documents

One of the most critical steps in preparing for an audit is ensuring all relevant documents are organized and accessible. Commonly requested documents include:

• Plan Document and Amendments: The original plan document and any updates or amendments.
• Summary Plan Description (SPD): A summary of the plan’s provisions provided to participants.
• Employee Census Data: A list of eligible, active, and terminated participants, along with their contributions and account balances.
• Third-Party Administrator (TPA) Reports: Reports from your TPA detailing contributions, distributions, and loans.
• Compliance Testing Results: Results from required nondiscrimination tests, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.
• Payroll Records: Documentation of employee and employer contributions.
• Form 5500: The most recent filing and any associated schedules.

4. Reconcile Contributions and Records

Ensure contributions and records are accurate and match across all systems. For example:

• Confirm payroll records align with TPA reports.
• Verify that employee deferrals and employer matches were deposited promptly (typically within seven business days).
• Address any discrepancies before the audit begins.

5. Communicate with Your Auditor

Schedule a meeting with your auditor to discuss the audit’s scope, timeline, and expectations. Ask them to provide a detailed list of required documents and a timeline for submission. Clear communication will help avoid delays and surprises.

6. Assess Internal Controls

Review your plan’s internal controls to ensure compliance with plan provisions. This includes processes for:

• Enrolling participants.
• Allocating contributions and forfeitures.
• Approving and monitoring loans and distributions.

If you identify weaknesses, take corrective action before the audit begins.

7. Work with Experienced Professionals

Engaging a CPA firm experienced in 401(k) audits can make a significant difference. They can help identify potential issues, recommend solutions, and guide you through the audit process.

8. Educate Your Team

Ensure your team understands their roles and responsibilities in managing the 401(k) plan. Proper training can reduce errors and ensure smoother audits in the future.

9. Address Prior Audit Findings

If this isn’t your first audit, review findings from previous audits. Ensure corrective actions were implemented and similar issues have not reoccurred.

10. Stay Ahead of Deadlines

Lastly, be mindful of deadlines, such as the Form 5500 filing deadline (typically July 31 for calendar-year plans). Completing the audit on time is essential to avoid penalties.

By staying organized, proactive, and communicative, you can ensure your 401(k) plan audit is a positive experience that reinforces compliance and plan integrity.