401(k) Plan Audit

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on January 30, 2024

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What Is a 401(k) Plan Audit?

A 401(k) plan audit refers to a review of a 401(k) plan's financial and operational activities by an independent third-party auditor to ensure that the plan is in compliance with all applicable federal laws and regulations.

The audit is intended to detect errors, misstatements, or omissions in the calculation of contributions or benefits, compliance with government regulations, or other matters related to the retirement plan.

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Types of 401(k) Plan Audits

There are two primary types of audits to assess a company’s 401(k) plan: full scope audit and limited scope audit.

Full Scope

The full scope audit is a comprehensive review investigating all operations, policies, and procedures related to the 401(k) plan.

It seeks to identify any areas of non-compliance with the Department of Labor (DOL), Internal Revenue Service (IRS), and other government regulations as defined by the Employee Retirement Income Security Act (ERISA).

A full scope audit typically takes more resources and time than a limited scope audit.

Limited Scope

A limited scope audit in a 401(k) plan is an independent objective examination and verification of specific financial records and reports associated with the plan.

Generally, this type of audit focuses on compliance with government regulations, or contributions and benefits calculations.

The scope may vary depending on resources and time available for the audit.

401(k) Plan Audit Scope

The scope of this audit often encompasses a variety of activities, such as the participant-level test, plan-level contributions, loans, non-discrimination test, administrative expenses, and fidelity bond policy.

401(k) Plan Audit Scope

Participant-Level Test

The purpose of the participant-level test is to ensure that all contributions to participant accounts are being made in accordance with ERISA guidelines and that any vested benefits have been properly reported.

This test can also be used to check if account balances have been accurately calculated at each period end.

Plan-Level Contributions

The plan-level contributions component reviews employer contributions to assess whether or not they are being properly credited to employee accounts.

As part of this assessment, the audit should include whether or not a proper notification was sent out regarding the start date for employer contributions, as well as checking for any missed deposits or late payments.

Loans

When conducting an audit, loans are another area that must be closely analyzed.

This includes tests on loan applications and repayment agreements as well as ensuring that they are not surpassing limitations established by ERISA.

Non-discrimination Test

The non-discrimination test identifies if there is any discrimination due to compensation or other factors regarding employer contributions or benefits provided under the plan design.

It verifies if certain employee classes benefit more than others in terms of employer match amounts or eligibility requirements for participation in the 401(k).

Administrative Expenses

Administrative expenses refer to ensuring the accuracy of expenses related to running the plan, such as recordkeeping fees, trustee/custodian fees, and monitoring costs associated with investments.

Additionally, it will also review how these costs are actually being paid from which accounts within the plan itself and make sure that appropriate criteria are met when selecting service providers for fund management services and more.

Fidelity Bond Policy

The fidelity bond policy assesses the sufficiency of bonds that employees responsible for handling funds must carry in order to cover any potential losses due to fraud.

It also verifies how often background checks are being conducted on key personnel involved in investment decisions or customer service roles within the 401(k) as required by the Department of Labor.

401(k) Plan Audit Requirements

During an audit of a 401(k) plan, plan administrators must also verify compliance with IRS regulations regarding distributions.

This includes reviewing the necessary paperwork for each distribution, as well as the distributions themselves to make sure they follow any applicable rules and guidelines.

Furthermore, it verifies that required notices were sent out prior to an eligible rollover or hardship withdrawal, and confirms whether terms related to required minimum distributions were adhered to.

The review also looks into whether the correct forms have been properly filed to ensure that taxation is correctly applied.

This includes verifying that any specified deadlines for submitting pertinent documents such as Form 1099-R for Retirement Plan Distribution and Form 5500 for Annual Return/Report of Employee Benefit Plan have been met.

This is crucial in ensuring accurate worker compensation when it comes to retirement benefits.

Audits also assess if loan repayments have been correctly credited to employee accounts, including identifying any repayment errors.

Additionally, audits verify if there has been any discrimination on the basis of age regarding 401(k) benefits or employer matching programs.

Cost of 401(k) Plan Audits to Employers

The cost of 401(k) plan audits varies depending on the complexity of a company’s retirement savings program.

However, there are certain expenses employers must be aware of when it comes to conducting such reviews.

The most common expense is accounting fees which cover the services of an auditor – usually an outside party.

This fee will depend on the number of tests required for each plan year; more complex plans may need additional work and thus incur greater costs in this regard.

Furthermore, companies need to account for recordkeeping expenses such as employee data management and related administrative duties needed to gather all participant information required for review.

These costs range depending on whether documents are kept electronically or physically; if physical records are involved, organizations should bear costs associated with scanning them into digital formats too.

In addition to these two types of fees, employers must also calculate any other costs incurred by their auditors during the process, such as travel and lodging (if necessary).

While these can be eliminated if an online platform is used for examining records, some organizations may still need to allocate funds towards having reports signed off by a CPA firm or examiner before submitting them.

A thorough audit of 401(k) plans helps to ensure that they comply with government regulations, but employers need to consider the financial cost associated with these reviews so that they can remain cost-effective without sacrificing their employees' security.

Tips for Preparing for 401(k) Plan Audits

Adequate preparation for a 401(k) plan audit is critical for employers to mitigate the risk of expensive errors and can give employers peace of mind that their plans are compliant with relevant regulations.

  • Collect all the relevant documentation related to the 401(k) plan such as plan documents, loan documents, investment papers, internal controls reports, and contribution records.

  • Understand the type and scope of the audit that will be conducted on your plan and make sure that all required areas are prepared in advance.

  • Set up internal controls designed to detect fraud or errors in the administration or operation of your 401(k) plan. Document these anti-fraud processes and review them regularly.

  • Perform regular check-ups on your 401(k) repairs by conducting independent internal reviews or having another firm conduct regular compliance testing.

  • Have an open dialogue between management and staff about expectations around the administration of the 401(k) plan to ensure that everyone is on the same page when it comes to procedures, record keeping, etc.

  • Put together a team that deals with any questions requested by auditors during their investigation process and uses those interactions as an opportunity to refine operations in order to improve efficiency in future audits.

Final Thoughts

A successful 401(k) audit is vital for meeting legal requirements, maintaining employee retirement funds, and avoiding any costly errors.

While a full scope audit encompasses all operations and policies, a limited scope audit focuses more on regulations compliance.

Companies need to take the necessary steps to ensure that they are well-prepared for the review.

This includes gathering records, verifying third-party service providers are compliant, and confirming tests that will be conducted before the audit takes place.

By doing so, organizations can ensure a smooth process and guarantee compliance with relevant regulations while also protecting employee interests.

401(k) Plan Audit FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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