401(k) Audit – Frequently Asked Questions

Virtually every Atlanta area company offers employees a retirement savings or employee benefit plan option. These plans are essential to attracting employment candidates and to help existing employees save for retirement. In fact, these plans have become a regular part of the benefit offerings of many companies, and are an expected component of the benefits package. While necessary, 401(k), 403(b) and other retirement plans present a compliance challenge for companies as they grow and increase the number of employees and total plan participants. Managing escalating compliance requirement can be difficult especially if the plan has reached certain benchmarks requiring an annual audit. To help clients, prospects and others navigate benefit plan audits and associated filings, Wilson Lewis has compiled a list of frequently asked questions below.

Common 401k Audit Questions 

 What is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that establishes guidelines for the administration of retirement plans for privately held companies. These requirements include providing plan participants with essential information about the plan features, funding and investment structure. ERISA also defines how long a person may be required to work before becoming eligible to accumulate benefits and plan funding rules, requires accountability of plan fiduciaries, provides participants the right to sue for benefits and breach of duty, and guarantees participants certain benefits if the plan is terminated. There are several 401k plan resources available on the Employee Benefits Security Administration site which further explore central themes covered in ERISA.

Are 401(k)s Subject to ERISA?

Yes. Any pension plans offered by non-governmental organizations, including both defined benefit and defined contribution plans (such as 401k, 403b and employee stock ownership plans), are regulated by ERISA. In addition, welfare benefit plans, Health Reimbursement Accounts (HSA) and Flexible Spending Plans (FSA) are also subject to ERISA.

What is Form 5500?

As required by ERISA, plan sponsors are required to submit information about the plan to the IRS using Form 5500. There are three versions of the Form varying in levels of detail and complexity including Form 5500 EZ, Form 5500-SF and Form 5500. The EZ version is used for solo 401k plans, the SF version is used by small 401k plans with less than 100 participants and the standard version is used by plans with 100 participants or more. For certain small and large plans, there are additional Schedules (A, C, D, G, H, I and R) and a copy of the independent auditor’s reports that must be submitted with the filing. This filing needs to be made on the last day of the seventh month following the plan’s year end.

When is a 401(k) Audit Required?

Most companies with benefit plans that have 120 or more active participants are required to undergo an annual plan audit. These audits, which are regulated by the Internal Revenue Service (IRS) and the Department of Labor (DOL), examine not only the financial vitality of a plan, but also various operational areas to ensure compliance with plan documents and other regulations. The audit findings and supporting documentation need to be submitted along with IRS Form 5500 Schedule H.

What is the Purpose of a 401(k) Audit?

Besides fulfilling the ERISA requirement, the purpose of an audit is to ensure the plan is operating in accordance with rules and regulations established by ERISA and governing plan documents. An audit will analyze various aspects of the plan’s operating environment, and process to identify errors or prohibited transactions. During the audit, questions about participation, plan asset valuation, contribution remittance, benefit payments, and transactions are assessed. The information uncovered in an audit will help the plan sponsor more effectively administer the plan, and reduce the opportunity for errors to occur. These audits protect plan participants, ensuring regulations are properly followed.

What is a Limited Scope Audit?

A limited scope audit allows a plan administrator the option not to have certain investment information tested. In this case, the auditor must receive certification, from the custodian of trustee, that all financial information presented is complete and accurate. These audits still require an examination of participant data, plan contributions and loans. Unfortunately, new regulations have been issued that will replace the limited scope audit option with ERISA Section 103(a)(3)(C) audits. This new audit type has several differences from the current limited scope audit, and require additional management disclosures.

What is a Full Scope Audit?

This audit type is like the limited scope audit but requires testing and procedures to be performed on investment data including year-end balance and investment income. These audits are common when certification information from the custodian or trustee is not available. All other aspects of the plan are analyzed in a full scope audit including participant data, plan contributions, participant loans and more.

What is the Small Pension Plan Audit Waiver?

Plans that have less than 100 active participants are typically able to receive a waiver from the plan audit requirement, assuming certain conditions are met. This includes when at least 95% of plan assets are considered Qualifying Plan Assets, an audit waiver disclosure must be included in the Summary Annual Report and a copy of statements (when requested) must be provided from the financial institution holding the plan’s assets. Qualifying Plan Assets include assets held by a regulated financial institution, shares issued by an investment company or qualifying employer securities outlined in ERISA.

What is the 80/120 Rule?

It is a rule that permits plans with between 80 and 120 eligible participants on the first day of the plan year to file as a small plan (less than 100 participants), if they filed as a small plan in the previous year. This means that a plan with 85 participants in year one and 110 in the following year is exempt from the annual audit requirement, even though they exceed the IRS requirement mentioned above. In order to understand if your plan qualifies to take advantage of the rule, it’s essential to clearly identify the total number of participants in the plan.

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The rules and regulations governing 401(k) and other benefit plan compliance can seem overwhelming. The good news is there are resources available to help you understand which apply to your situation and how to manage them. If you have questions about a 401(k) issue or need assistance with your next benefit plan audit, Wilson Lewis can help! For additional information please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon!