The 401(k) Audit Requirement

”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500 filing.…

Auditors of 401(k) plans must not only have knowledge of the current auditing and accounting standards, but they must be familiar with ERISA, IRS and DOL laws and regulations and they must be familiar with the unique requirements of 401(k) plans.…

Deficient 401(k) Plan Audits

The Department of Labor and the AICPA have expressed that 401(k) audits have an unnacceptably high rate of deficiencies. This is important because the Department of Labor can reject any Form 5500 filing which has a deficient audit.…

Form 5500

401(k) plans must file an annual Form 5500 with the Internal Revenue Service (IRS) and the Department of Labor (DOL).…

Limited Scope

As permitted by 29 CFR 2520.103-8 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA, a plan administrator is permitted to instruct the auditor not to perform any auditing procedures with respect to the information prepared and certified by a bank or similar institution or by an insurance carrier that …

ERISA

ERISA is the acronym for the Employee Retirement Income Security Act of 1974. ERISA is a federal law that sets the standards for most voluntary established pension plans in private industry to provide protection for individuals participating in these plans. ERISA requires plans to…

Monitoring ERISA Audits

The DOL Employee Benefits Security Administration (EBSA) Office of the Chief Accountant (OCA) administers three different enforcement programs to assess the audit quality of audit firms.…

Plan Fiduciaries

Fiduciaries of a benefit plan have certain legal obligations to employees who participate in a plan. The fiduciaries must act solely in the interests of participants and beneficiaries, for the purpose of providing benefits and paying reasonable plan expenses. Fiduciaries must perform their functions in a prudent and vigilant manner and must comply with any …

New Regulations and Standards

Auditors and plan fiduciaries need to stay educated on industry developments and changes. Over the last couple of years, several new significant standards and regulations have been made effective.…

Economic Conditions

A downturn in the economy can raise several risks with a 401(k) plan.…

Kevin D. Smith, CPA, PLLC

Kevin D. Smith, CPA, PLLC is a firm located in Phoenix Arizona focusing on auditing and accounting services for small to midsize companies and performing peer reviews for other CPA firms. We specialize in auditing 401(k) plans…

You should know…
Common audit deficiency - no audit work performed for related parties.
Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year.
A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I.
Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category (Schedule H or Schedule I) of form 5500 it filed the year before.
“Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
Common audit deficiency - no audit documentation for testing participant data.
Quality audits for 401(k) plans are imperative, not only because they help ensure plan compliance for the benefit of the participants, but quality audits are important because the DOL can reject the annual Form 5500 filing when the DOL determines an audit failure has occurred.
The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit.
Common audit deficiency - failure to test eligibility to receive benefit payments.
It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.
Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
Common audit deficiency - inadequate or missing disclosures.
Common audit deficiency - testing of payroll data is insufficient.
Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
Common audit deficiency - inappropriate reliance on SOC 1 reports.
Common audit deficiency - no testing of participant eligibility or forfeitures.
The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.
Common audit deficiency - failure to test employee deferrals.
Common audit deficiency - failure to test timeliness of participant contributions
Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans.
Common audit deficiency - no testing of investment income allocation to participants.
Common audit deficiency - no audit work performed for contributions.
Common audit deficiency - failure to obtain proper certification for a limited scope audit.
Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
Common audit deficiency - no audit work performed for benefit payments.

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401(k) Audits

What is a 401(k) plan and why does it have to be audited? A 401(k) retirement plan is sometimes called a “cash or deferred arrangement” or “CDA” but is popularly known by the Internal Revenue Code Section “401(k)” that pertains to it. A 401(k) plan allows participants to contribute a portion of their compensation to the retirement plan without being taxed on the contributed amount. An account is created for each participant which will track the contributions, distributions, investments, gains and losses.

401(k) plans must file an annual Form 5500 with the Internal Revenue Service (IRS) and the Department of Labor (DOL). “Large” plans, generally meaning those plans with 100 or more participants, must also file an audit with the Form 5500. The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans. The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit. It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.

Please examine the other pages of this website for more information about 401(k) plans and performing audits of 401(k) plans.

Auditing 401(k) Plans