Part 3 of 3 in the “How to Survive a 401(k) Audit”
By Tyler Kleinschmidt, CPA How can your company survive its 401(k) audit? How does one survive a relationship? Much like starting any new relationship, Part 1 of this series focused on a brief history of pension plans (What do you do, why are you here?). Then Part 2 moved onto “participant contributions” (What do you bring to this relationship and how much are you able to participate?). And finally, Part 3 will focus on the challenges with early plan distributions (Why are you withdrawing from this relationship? Everything was going smoothly.).
Early plan distributions are never easy, but there are steps you can take now to support these actions for when your 401(k) plan is audited. First you must understand in what scenarios a member can take a plan distribution. The following are several different options that may be available to participants. Please refer to your plan documents for your specific plan options.
Retirement or death
Distributions due to retirement or death can be withdrawn in either a lump sum or structured payout. As administrator, you must understand where the money is going and be sure to complete the following key documents:
- Retirement papers/support, including age, if applicable
- Death certificate, if applicable
- Application of payment
- Spousal consent, if applicable
- Vested participant balance statement
Flexibility is important in every relationship. Being a “go with the flow kind of person” can be a plus. When withdrawing from a 401(k) plan, there are many positives to rollovers. For instance, they are tax deferred with tax free transactions. Full withdrawals can be paid at termination of employment and rolled into a new 401(k) plan or something different and exciting.
Qualified Domestic Relations Order (QDRO)
The QDRO disbursement typically comes from the result of a divorce in one lump sum with required documents of a court order and vested participant account balance. Although difficult, sometimes this distribution is for the best.
Sometimes, if certain conditions are met, money can be withdrawn for hardships. This type of transaction is taxable, but penalty free. However, you must keep supporting documentation identifying the conditions of hardship. Furthermore, this requires a stoppage of contributions to the Plan for six months following the withdrawal (including the company match).
Sometimes a relationship is short-lived and ends quickly with an early payout. This happens when there is termination of employment including a payout of the vested balance. Even though this seems like an easy and clean break, an early payout may include penalties and taxes.
In addition to the early payout situations noted above, there is a circumstance when law requires a plan member to make a distribution. The Employee Retirement Income Security Act of 1974, (ERISA), identifies required corrective distributions when a highly compensated individual over contributes to the plan. This early distribution is usually shown as a reduction to contributions and is paid within two-and-a-half months of the year-end.
Regardless of which type of plan your company has, there will always be administrative expenses (Who will do the laundry or who will repair the leaky faucet?). There will be fees for participant initiated transactions. It’s important to remember that 401(k) plans typically do not have plan based fees; i.e. trustee, audit, etc., charged to them, but rather are paid by the plan sponsors.
So you’ve survived the early distribution process and are now ready to take the next steps to evaluating these options. From an audit perspective, whichever disbursement is chosen, samples must be taken to support the following:
- Correct account balance
- Re-compute payment
- Timeliness of payment (potential liability)
- Other possible procedures (confirmation)
With any of these procedures, it’s important to make sure disbursements are in line with the plan documents, made to the correct person/entity and recorded properly. Also, a continuing challenge facing 401(k) audits is the growing trend of electronic paperless transactions. Despite this, auditors must continue to test for and view necessary information to support conclusions. And always remember with relationships and 401(k) audits, if you don’t document it, you didn’t do it!
Contact Alerding CPA Group for assistance with your 401(k) audit. We can be reached at 317-569-4181 or www.alerdingcpagroup.com.
For more information on “How to survive a 401(k) audit”, read the other blogs in this series:
This post was written by:
Tyler Kleinschmidt, CPA
As an Audit Senior, Tyler is responsible for the performance of audit fieldwork, financial reporting and directly supervising the staff on the engagement.