Auditing 401(k) Plans

Valid Institutions

Valid Institutions

The limited scope election is valid only for information certified by a bank, insurance carrier, or similar institution that is federally or state chartered and is regulated, supervised, and subject to periodic examination by a federal or state agency.  The limited scope audit provision does not apply to information regarding investments held by a broker/dealer or some investment companies like those that are not chartered and regulated by a federal or state agency.

 

 

 

 

 

 

 

 

 

 

 …

Investment Information at the Plan Level

Investment Information at the Plan Level

When performing a limited scope audit of financial statements, the auditor need not perform any auditing procedures with respect to investment information prepared and certified by a qualified bank or similar institution or by an insurance carrier.  It is a common misconception that the limited scope certification also applies to the participant investment allocation and investment earnings allocated to the participant accounts.  The certification only applies to investment information at the plan level.

 

 

 

 

 

 

 

 

 

 

 …

Accuracy and Completeness

Accuracy and Completeness

The limited scope election is available only if the trustee or custodian certifies both as to accuracy and completeness of the information submitted.  Certifications that address only accuracy or completeness, but not both, do not comply with the DOL’s regulations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 …

  • Home
  • Limited Scope Audits

  • You should know…

    Common audit deficiency - inadequate or missing disclosures.
    Common audit deficiency - no audit documentation for testing participant data.
    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.
    ”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
    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 - no testing of investment income allocation to participants.
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and 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.
    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.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (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.
    Common audit deficiency - no audit work performed for benefit payments.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    Common audit deficiency - failure to test timeliness of participant contributions
    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.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    “Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
    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.
    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.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    Common audit deficiency - failure to test employee deferrals.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Common audit deficiency - no audit work performed for contributions.
    Common audit deficiency - no audit work performed for related parties.
    Common audit deficiency - testing of payroll data is insufficient.

Limited Scope Audits

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 is regulated, supervised, and subject to periodic examination by a state or federal agency and that acts as a trustee or custodian for the plan’s assets. This limited scope audit provision does not apply to information regarding investments held by a broker/dealer or some investment companies which are not chartered and regulated by a federal or state agency. Also, the election is available only if the trustee or custodian certifies both as to accuracy and completeness of the information submitted.

The limited scope exemption applies only to investment information including investments, investment income, and related expenses, as well as participant loans. Although participant loans are not characterized as investments for financial statement reporting purposes, participant loans are reported on the form 5500 as investments, and if held and certified by the trustee, would meet the exemption and not be subject to audit.

It is a common misunderstanding that the certification also applies to participant investment allocation and investment earnings allocated to the participant accounts. The certification only applies to investments and investment related information at the plan level. Auditors must still perform procedures to test the amount of investment income allocated to individual participant accounts. The auditor must also test to determine if the participant’s account is invested in accordance with the participant’s desired investment selections.

© 2025 401(k) Plan Audits
Powered By DynamiX