Why must our 401(k) be audited?

| Audit and Accounting, Business Miscellaneous

Part 1 of 3 in the “How to survive a 401(k) audit” series

By Evan Rauch, CPA     For generations, defined benefit pension plans were the retirement plan standard for just about every employer. However, these pensions became financially draining for employers as the life expectancy of their retired employees increased, making way for a new type of retirement plan – the defined contribution plan or a profit sharing plan.  Nearly 40 years later, defined contribution plans have become the norm for today’s workforce with approximately 78% of all full-time workers having the opportunity to participate in one.

Since defined contribution plans are based on the employees contributing their own money, specific standards, laws and reporting requirements had to be put in place to protect these contributions.  In 1974, the U.S. Department of Labor enacted the Employee Retirement Income Security Act (ERISA).  ERISA protects the rights and benefits of participants and beneficiaries, as well as regulators, while also allowing them access to sufficient information.  To reinforce the plan’s transparency, all companies who provide a retirement plan are required to file an annual Form 5500 which outlines the financial condition, investments and annual results of the plan.

Based on the number of plan participants, some plans are required by law to undergo an annual audit.  This applies primarily to large plans with 100 or more participants. Smaller plans, those with less than 100 participants, generally are not required to be audited.

During an audit, many different parts of the benefit plan will be tested.  Some of the most common areas auditors focus on include:

  • Ensuring employees are eligible to participate in the plan, based on the plan documents;
  • Determining employee contributions are being properly withheld from payroll and remitted to the plan in a timely manner along with the employer match, if any;
  • Verifying contributions are being allocated to the proper investments;
  • Testing benefit payments, loans and administration fees taken out of the plan.

These audit tests, and the additional reporting requirements, are steps the Department of Labor has taken to help protect today’s workforce and ensure that the money participants are setting aside for retirement will be there when they are ready.

To begin your preparations, contact your third party administrator to determine if your plan qualifies for a large or small plan. If you qualify as a large plan in the current year…don’t panic!  We will feature additional segments with advice surrounding best practices in regards to documentation and on how to properly prepare for an audit.

Evan Rauch is a Audit Senior with Alerding CPA Group.  To find out more about conducting a 401(k) audit at your company, contact Sarah Gregory, Audit Manager, at Alerding CPA Group, 317-569-4181 ext. 235 or sgregory@alerdingcpagroup.com. Alerding CPA Group is an Indianapolis-based public accounting firm. Visit our website at www.alerdingcpagroup.com.

For more information on “How to survive a 401(k) audit”, read the other blogs in this series:

Part 2:  How can I make our 401(k) audit run smoothly?

Part 3:  How are 401(k) withdrawals like a relationship?

This post was written by:

Evan Rauch, CPA
Audit Supervisor

As an audit supervisor, Evan Rauch is responsible for the performance of audit fieldwork, financial reporting and directly supervising the staff on the engagement. He has been with Alerding CPA Group for five years.


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