By: André Nel
Saving for retirement continues to be a hot topic when it comes to financial planning. People of all ages are deeply concerned that they won’t be able to fund the lifestyle they want after leaving the workforce. They are focused on putting enough money aside throughout their careers to minimize reliance on government programs such as Social Security, which is a subject of constant debate among politicians and lawmakers.
Employers have generally done away with pension plans in favor of retirement benefits that encourage employee contributions, and one of the most popular is the 401(k). This employer-sponsored retirement savings plan offers tax advantages for participants, allowing them to save for retirement with pre-tax dollars. In many cases, employers match a portion of employee contributions as part of the comprehensive employee benefits package.
Employer-sponsored 401(k) programs are heavily regulated, as plans must comply with specific requirements to maintain their tax-advantaged status. 401(k) errors can be quite costly for organizations to remedy, and in a worst-case scenario, plans that leave issues unresolved can lose their tax-advantaged status altogether.
401(k) Audits: The Basics
The primary method of ensuring that 401(k) plans comply with applicable regulations is the submission of annual reports. The Employee Retirement Income Security Act (ERISA) defines large plans as those with 100 or more participants, and the US Department of Labor U.S. Department of Labor requires large plans to submit an independent audit each year. In addition, the IRS requires employers who sponsor a plan of any size to file Form 5500, along with supporting documentation. It is important to note that for the purpose of determining whether the business has a “large plan,” anyone who is eligible to join the plan is considered a participant – even individuals who have not opened an account and have never made a contribution.
Organizations that meet the definition of “large plan” are responsible for making arrangements to have an audit completed by the auditor of their choice. This independent, third-party evaluation is intended to protect participants by providing them with detailed information on how their accounts are managed and whether the plan meets all regulatory requirements. Auditors also verify that the plan is operating according to the terms outlined in the original agreement that was distributed to participants. For example, employers are not required to provide a company match by law. However, if the plan promises a company match, auditors ensure these funds are being deposited to participant accounts as agreed.
Common Items Examined by Auditors
Accountants assigned to 401(k) audits typically have specialized experience and expertise in these plans and can perform full audits or limited scope audits as necessary. This skill permits them to comb through plan documents efficiently, taking note of specific areas of interest. They compare the data obtained from plan documents with the plan’s financial data to ensure the two match. Important questions auditors seek answers to include the following:
- Are all eligible employees able to participate?
- Is the ratio of highly compensated participants excessive when compared to other participants?
- Are vesting schedules being adhered to?
- Are contribution maximums being observed?
- Are required distributions being taken?
- Are participants receiving all necessary communications?
- Are funds being invested responsibly?
- Are fees and commissions fair?
- Are employee payroll contributions credited to accounts promptly?
- Is the employer depositing promised matching funds promptly?
- Does the plan have any outstanding tax issues?
- Does the plan adhere to all applicable regulations?
The best way to prepare for an audit is to gather all relevant information, including historical and current plan documents, amendments and summary plan descriptions. In addition, auditors will review the reports and tax documents submitted in prior years.
Choosing an Auditor
As with any other product, your independent audit will only be as good as the time, effort, and skill that go into creating it. Choosing the right auditor is a key component in obtaining reliable results. Unfortunately, audit firms are not equal in experience and expertise, and studies show that firms with less experience produce far less accurate results. In May 2015, the DOL completed a report on Assessing the Quality of Employee Benefit Plan Audits, and the findings were alarming. After reviewing 81,000 audits that were prepared by 7,330 independent audit firms, the DOL found that errors put “$653 billion and 22.5 million plan participants and beneficiaries at risk.”
When choosing an auditor to review your company’s 401(k) plan, consider the following points:
- How many audits has the firm performed? Most errors are made by less-experienced firms.
- Who is providing the referral/recommendation? Many firms have high peer review scores, though their work is sub-par.
- Does the firm participate in industry organizations? Firms that maintain memberships in the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center have significantly lower error rates.
- Do auditors participate in continuing education? While accounting professionals typically take regular training courses, ensure that the individuals performing your audit participate in continuing education courses specifically designed to keep 401(k) audit skills fresh and up-to-date.
Today’s workforce takes their retirement benefits seriously, regardless of age or pay grade. Offering a 401(k) plan is important for attracting and retaining top talent. However, 401(k) plans are subject to strict regulations, and mismanagement of plan funds – even unintentionally – can have serious legal and financial consequences. Choosing an experienced audit firm to conduct required annual audits is the best defense against plan management errors. These specialists are trained to identify current and potential issues so they can be rectified as quickly and inexpensively as possible. Contact the professionals at Goldin Peiser & Peiser if you are in need of a 401(k) audit.