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

| Audit and Accounting, Business Miscellaneous

Part 2 of 3 in the “How to survive a 401(k) audit” series

By Justin Schwartz, CPA   Preparing for a defined benefit or profit sharing plan audit may seem like a daunting task; however, understanding which key areas the auditor may be testing should help put your mind at ease.  Auditors typically focus on three main areas:  participant data, employee/employer contributions and withdrawals from the plan.  We will focus on participant data and employee/employer contributions below.

Auditors often cross reference participant data maintained by the employer with data maintained by the third-party administrator.  To assist with this process, employers may want to establish controls which include internal audits whenever participant data changes.

Examples of participant data include:

  • Date of hire
  • Date of birth
  • Date of termination (if applicable)
  • Employment status (i.e. full-time, part-time, terminated)
  • Wage rate
  • Exempt or non-exempt status
  • Hours of service

Participant data testing focuses on documentation.   As a general rule, employers should always document, in writing, any changes to a participant’s data and keep a copy in the employee’s personnel file.

Types of documentation to keep in file:

  • Employee’s election whether or not to participate in plan
  • All participant data changes
  • Contribution amounts/percentages and any subsequent changes
  • Allocation contribution among investment options
  • Wage rate and subsequent adjustments

As accounting and human resource software transitions to paperless records, employers should update their controls related to maintaining participant data.  Ask your auditor for recommendations with developing these controls.

As the audit progresses, auditors will likely test contributions, such as:

  • Vouching employee/employer contributions to wire transfer notices or other supporting documentation.
  • Ensure participants were eligible and elected to join the plan or were enrolled automatically in accordance with the plan text and regulations.
  • Recalculation of employee/employer contributions with the plan and Internal Revenue Code limits, including proper definition of eligible compensation, deferral rates and matching contribution formulas.
  • Agree contributions were properly recorded in the participant’s account and allocated as determined by the participant.

The IRS has set annual employee contribution limitations.  Since 2015, these limitations have been $18,000 with an additional catch-up amount of $6,000 for those over age 50.

Preparation, organization and having the appropriate controls in place are the best ways to help your 401(k) audit run smoothly.

Justin Schwartz is an 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 visit our website at  Alerding CPA Group is an Indianapolis-based public accounting firm.

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

Part 1: Why must our 401(k) be audited?

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

This post was written by:

Justin Schwartz, CPA
Audit Senior

As an Audit Senior, Justin is responsible for the performance of audit fieldwork, financial reporting and directly supervising the staff on the engagement.