How to Prepare for an Employee Benefit Plan Audit

Navigating Your 401(k) Plan Audit: A Guide for Plan Administrators

Facing an upcoming 401(k) plan audit can feel daunting, but it doesn’t have to be. For plan administrators, especially those managing plans with 100 or more participants, understanding this essential process is key to ensuring ERISA compliance and protecting your plan’s integrity.

Auditing employee benefit plans isn’t just a regulatory hurdle; it’s a critical safeguard for participants’ retirement savings and a vital part of your annual Form 5500 filing. The IRS and Department of Labor (DOL) closely scrutinize these reports to ensure compliance with legislative and regulatory requirements under the Employee Retirement Income Security Act (ERISA).

To help you confidently navigate this essential process, here’s a comprehensive guide to preparing for your next 401(k) plan audit.

1. Get Your Ducks in a Row: Gathering and Organizing Documents

The foundation of a smooth audit lies in meticulous record-keeping. Auditors will review various aspects of your benefit plan, including contributions, distributions, investments, participant records, and plan transactions. By organizing the corresponding documents, you provide the necessary supporting evidence to validate the accuracy and completeness of reported information.

Here’s a checklist of key documents to prepare:

• Executed Plan Document & Amendments: Ensure you have the current version and all past amendments.
• IRS Determination Letter: Or documentation of the plan’s tax-qualified status.
• Summary Plan Description (SPD): Ensure it’s accurate and up-to-date.
• Participant Records: Enrollment forms, beneficiary designations, loan agreements, and distribution requests.
• Payroll Records: Documentation of employee contributions and employer matching/profit-sharing contributions.
• Investment Statements: Monthly or quarterly statements from the plan’s trust and investment providers.
• Contribution Remittance Records: Evidence of timely deposit of contributions to the plan trust.
• Distribution Documentation: Records for all participant withdrawals and rollovers.

Tip: Consider creating a secure, shared digital folder for these documents well in advance of the audit. A well-organized documentation process not only eases the audit but also demonstrates your commitment to good governance.

2. Embrace Your Role: Fiduciary Responsibility

At the heart of every well-run employee benefit plan is robust fiduciary oversight. Fiduciaries are legally obligated to act solely in the best interests of plan participants and beneficiaries, placing those interests above their own. Auditors will meticulously review evidence of your fiduciary processes and decisions.

Key actions to demonstrate strong fiduciary responsibility include:

• Form a 401(k) Administrative Committee: Establish a formal committee with clear roles and responsibilities.
• Hold Regular Meetings & Document Everything: Conduct frequent meetings and diligently record all decisions, discussions, and due diligence in meeting minutes. This is especially crucial for investment selection, monitoring, and fee reviews.
• Review Administrative Fees for Reasonableness: Regularly benchmark plan fees (administrative, recordkeeping, investment management) against industry standards to ensure they are fair and in the best interest of participants.
• Stay Educated: Ensure fiduciaries receive ongoing education and training to stay abreast of their duties and regulatory changes.

Remember, neglecting fiduciary duties can lead to significant penalties and even personal liability, so proactive management is paramount.

3. Bolster Your Defenses: Internal Controls

Strong internal controls are the bedrock of a successful and compliant employee benefit plan, providing auditors with confidence in your plan’s financial integrity. These are the policies, procedures, and practices you implement to safeguard plan assets, ensure accurate financial reporting, and promote compliance.

Crucial internal controls for benefit plans include:

• Segregation of Duties: Ensure no single individual has complete control over a transaction. For example, one person initiates contributions, another approves them, and a third reconciles the accounts.
• Regular Reconciliation Processes: Meticulously reconcile participant data with payroll records and Third-Party Administrator (TPA) reports. Also, reconcile trust statements with TPA records and internal books at least quarterly, but preferably monthly.
• Review of TPA Reports: Thoroughly review the TPA’s SOC 1 (Service Organization Controls) report. Understand its scope and promptly address any identified control gaps or “user control considerations” outlined in the report.
• Participant Data Management: Implement robust procedures for onboarding new participants, processing changes (e.g., address updates, beneficiary changes), and tracking distributions, ensuring data accuracy and completeness.
• Timely Remittance of Contributions: Verify that both employee and employer contributions are remitted to the plan trust in a timely manner, as required by ERISA.

By implementing and adhering to these controls, you significantly reduce the risk of errors, fraud, and non-compliance, making the audit process much smoother.

Confidently Navigating Your Audit

Preparing for an employee benefit plan audit is crucial in ensuring compliance, mitigating risks, and maintaining the integrity of your benefit plan. You can confidently navigate the audit process by proactively gathering and organizing relevant documents, upholding your fiduciary responsibilities, and establishing robust internal controls.

Don’t wait until the last minute. Proactive preparation can transform your next 401(k) plan audit from a compliance hurdle into a smooth, validating process, ultimately fostering trust and ensuring the effective management of your employee benefit plan.

Do you have any specific areas of your 401(k) plan you’re most concerned about for your upcoming audit?