4 Tips for a Painless 401k Audit
If you manage your company’s 401k plan, preparing for an annual plan audit can be stressful, especially if your company has not been required to be audited in the past.
There are plenty of moving parts, important details, and careful planning that go into a well-positioned and 100% compliant 401k plan- and each of these will be carefully examined by your outside CPA firm during an audit. In order for your 401k audit to be a successful one, every “i” must be dotted, and every “t” crossed.
Sound nerve wracking? It can be. Fortunately, careful preparation can go a long way in making your 401k audit as easy as possible. Here are four tips for a (relatively) painless audit:
1. Start early.
Don’t wait until your CPA firm’s first visit to gather the needed documents and get
your financials in order. Last-minute preparation will just add unnecessary stress. Compliance, documentation, and solid financial reporting should always be top priorities when managing a 401k plan of any size.
As the number of eligible participants in your company’s plan grows, you should anticipate the approaching magic number—120 eligible participants—which will put you in the “large” plan category and thus require your plan to be audited by an outside, independent CPA firm.
Regardless of the size of your plan, managing it as though it will be audited will help encourage best practices- and ensure you’re in the best position possible when it comes time for your first audit.
2. Form a strong 401k administrative committee.
Having a knowledgeable and proactive group at the core of your 401k administration is key to plan success. Too often, 401k planning groups are disorganized or disjointed, with members unsure of their roles and responsibilities. This can cause serious problems and a lack of accountability.
Create your 401k administrative committee with executive-level company officers from offices that include human resources, finance, and legal departments. Ensure that everyone knows what they are supposed to be doing on a monthly, quarterly, and annual basis to keep the plan compliant and current.
Regular meetings should be held to address any and all issues, and careful minutes should be kept- these minutes will be part of your documentation come audit time.
3. Get your paperwork in order.
Perhaps the most time-consuming of tasks facing a company preparing for a 401k audit is the gathering of needed paperwork. The list of documents you’ll need to hand over to your CPA firm is quite lengthy, and each and every document must be current to reflect any plan updates or changes.
Whether you’re expecting an external audit this year or a few years down the road, organizing all plan-related documentation and keeping it updated will make the process much easier when it comes time.
4. Take a quick “plan vs. reality” check.
Unfortunately, it’s common for the plan to be governed or handled differently than outlined in plan documents or 401k rules. Checking the plan documents against actual company practices can help detect noncompliance issues early.
Check these points:
- Loans: Are there any outstanding loans? Are they compliant with the loan policy described in the plan papers?
- Eligible compensation: Read the plan paper’s definition of eligible compensation and check it against a few employees’ payroll records- was all of their eligible compensation included when calculating their deferrals?
- Eligible participants: Would all plan participants be considered “eligible participants” by the guidelines outlined in the plan documents?