Tips to prepare for your upcoming 401k plan audit – from the auditor perspective

The calendar has barely turned to 2021, but auditors of 401k plans are already planning for their 401k audits in the spring and summer. Audit request lists will soon be going out to Plan Sponsors to confirm audit dates and information request dates. While the receipt of these request lists can cause blood pressure to rise at the Plan Sponsor, there are some simple tasks the Plan Sponsor can perform to prepare for the annual audit of their 401k plan, and make the audit process smoother

Whether you are a Plan Sponsor, TPA or advisor, here are some tips which will help to make the audit process go smoother for all parties involved.

Designate someone at the Plan Sponsor as being in-charge and responsible for the audit. The Plan Sponsor should have a “point person” for the audit team to contact. The point person at the Plan Sponsor is responsible for ensuring that all audit requests are provided to the audit firm timely, as well as being the main point of contact before, during, and after the audit fieldwork. The point person for the audit ensures that all parties involved in the audit understand what information they will provide to the audit firm, and that the audit remains on the agreed-upon timeline.

In my experience, 401k plan audits in which the Plan Sponsor has not assigned a point person just do not run as smoothly compared to those audit which have a person at the Plan Sponsor dedicated to the audit process.

New audit standard implementation?  There is a new audit standard which directly impacts audits of retirement plans. Statement on Auditing Standard (SAS) No. 136 is effective for plan years ending after December 15, 2021, with early adoption allowed. Most CPA firms will not adopt this new standard until the audits of plans with year ends of December 31, 2021 or later. However, some CPA firm may choose to early adopt this audit standard for plans with December 31, 2020 year ends.

Plan Sponsors should check with their CPA firm now to see if their CPA firm will be early-adopting the new requirements of SAS 136. If the answer is “Yes”, then you should read my article on how this new audit standard will impact Plan Sponsors.

 https://www.linkedin.com/pulse/new-audit-standard-impact-large-erisa-plan-financial-bartells-cpa

Set up a calendar of key dates, to keep the Plan Sponsor and audit team on track to a timely completion of the audit. Plan audits tend to drag out if there are not key completion dates for the audit firm and Plan Sponsor to work towards. Some recommended key dates to have on your audit calendar would include:

-         Date TPA will provide audit package to audit firm.

-         Date all audit requests will be provided to audit firm.

-         Dates of audit fieldwork.

-         Date open items will be provide to audit firm post-fieldwork.

-         Date draft financial statements to be provided to Plan Sponsor.

-         Date final reports to be provide to Plan Sponsor.

Provide minutes from meetings plan oversight committee. If the Plan Sponsor has not kept meeting minutes, now is the time to put those together. Keeping detailed minutes of the meetings of the Plan Oversight Committee is the best way to document that management is keeping up with their responsibilities with respect to the Plan. For tips on taking minutes from these meetings, see my article linked here on ‘Time to catch up on those 401k committee meeting minutes!”https://www.linkedin.com/pulse/time-catch-up-those-401k-plan-committee-meeting-bradley-bartells-cpa

Census reconciliation: The annual employee census report is a key document the audit firm uses to plan for the audit. Your auditor needs to know that the census report is complete and contains all employees for the year under audit. A simple task the Plan Sponsor can perform is to provide your auditor with a reconciliation of total gross wages from your annual census report to the year to date payroll summary report. Differences between total wages on the census report and payroll summary report could indicate a potential error in the census report.

Keep a summary list of key plan amendments and changes during the year. Provide your audit firm with copies of all plan amendments. Key plan amendments which will impact your plan audit include:

-         Eligibility amendments

-         Matching formula changes

-         Changes in vesting requirements

-         Changes in distribution requirements

-         Addition or removal of plan loans

Have all audit requests ready when the audit team arrives. Your audit team wants to hit the ground running on the day the audit starts. Make sure the Plan Sponsor has a clear understanding the dates that the audit team needs all requested information ready and available. If the audit is being performed at the Plan Sponsor location, make sure that all documents are waiting for the audit team when the arrive. This will allow your audit team to get in and out of your office faster. Or, for audits performed remotely, have all information provided to your auditor prior to the scheduled start date of the audit.

Provide your audit firm with a list of key subsequent events occurring after the end of the plan year. Considerations:

-         Any layoffs which could potentially trigger partial plan termination implications?

-         Were there any additional employer contributions after the end of the Plan year?

-         Are there any legal issues?

-         Have there been any plan amendments?

-         Has there been an approved merger or termination of the Plan?

Were there any plan testing failures? How were top heavy or ADP/ACP testing failures corrected? Give your audit firm a list of the compliance testing results, and if there were any failures, provide information for how the testing failures were corrected.

Has there been any correspondence from the Department of Labor or IRS? Let your auditor know and provide copies of the letters. 

Has there been changes in key personnel working with the plan? Let your plan auditor know about these changes.

Were there any changes in the TPA, custodian, recordkeeper, or payroll provider during the year under audit? If so, let your auditor know about these changes early in the planning process, as these change may require your audit firm to perform additional audit procedures to test changes in these providers.

Obtain the SOC-1, Type II reports for your Plan’s key service providers. Typically the Plan’s recordkeeper/custodian and the payroll provider are the key service providers for your plan. Make sure someone at the Plan Sponsor has read and reviewed these reports prior to the audit of your Plan. If there are issues in the SOC-1 report you will need to determine if there are any impacts to your plan and discuss with your auditor.

Timeliness of the remittance of participant contributions. Review a schedule of your pay dates and the dates the related employee deferrals were remitted to the custodian. If the number of days between the pay date and remittance date are too large compared to others during the year, you will need to consider reporting these as late remittances on your 5500. Provide a list of potential late remittances to your audit firm for discussion.

Other considerations for a 1st-time audit: Is your 401k plan being audited for the first time? Congratulations! In addition to the above information, you will need to provide the auditor of your plan the following:

-         The current year AND prior year audit package to your auditor.

- Provide all relevant plan documents to your auditor:

-         Full Plan Document

-         Summary Plan Document

-         Copies of all plan amendments

-         Copies of insurance contracts

-         Other relevant contracts and agreements.

Just remember that the auditor of your 401k plan is there to work with you, not against you. We are looking to find ways to protect you and your plan in the event your plan is selected by the Department of Labor for an examination. The more the Plan Sponsor can do to prepare for the annual audit, the smoother and quicker the audit process will be completed.

Lastly, make sure the CPA firm which audits your 401k plan specializes in these types of audits. Bradley Bartells of MUN CPAs is your “Go-To Guy” for retirement plan audits. Give me a call to talk about your plan audit questions and concerns.