Auditing 401(k) Plans

Auditor Knowledge

Auditor Knowledge

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.

 

 

 

 

 

 

 

 

 

 

 

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Audit Failure

Audit Failure

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.

 

 

 

 

 

 

 

 

 

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Licensed CPA

Licensed CPA

Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant    by a State regulatory authority.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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  • You should know…

    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Common audit deficiency - testing of payroll data is insufficient.
    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.
    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 audit documentation for testing participant data.
    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.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    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 - inadequate or missing disclosures.
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    ”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 - no audit work performed for benefit payments.
    Common audit deficiency - no testing of investment income allocation to participants.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    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.
    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.
    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 - no audit work performed for related parties.
    Common audit deficiency - failure to test timeliness of participant contributions
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Common audit deficiency - no audit work performed for contributions.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.

401(k) Plan

Auditor Expertise

Audits of 401(k) plans require expertise and a specific set of skills.  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 such as:

  • Non-discrimination testing
  • Safe harbor methods
  • Plan tax status
  • Investment allocations
  • Prohibited transactions
  • Late remittance of contributions
  • Limited scope certification

  • Participant eligibility
  • SOC 1 reports
  • 80-120 participant rule
  • Required supplemental schedules
  • Hardship rules
  • Partial plan terminations
  • ERISA bonding requirements

401(k) plan auditors must also constantly educate themselves to stay on top of new rules and regulations such as the 408(b)(2) service provider rules which went into effect July 1,2012 and the 404(a) participant disclosure rules which went into effect August 30, 2012.

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.

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