Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

5 tips to avoid common audit prep mistakes

Generally, if your company has 100 or more active participants, The Employee Retirements Income Security Act of 1974 (ERISA) requires an annual audit of plan financial statements. Whether this is your first plan audit or have endured plan audits for years, being prepared and gathering all the necessary documents and reports for your auditors can seem like a cumbersome task for even the most experienced plan administrators. Here are some common audit prep mistakes.

Don’t miss: Plan terminations and partial plan terminations

Failing to check key figures or census data prior to the audit can lead to significant audit findings, or even worse, ERISA compliance issues. Be sure your next benefit plan audit progresses seamlessly by avoiding these common 401(k) audit pitfalls.

  1. Review and reconcile annual contributions to the plan. Several plan administrators are tasked with reconciling payroll remittances to the third-party administrator (TPA) bi-weekly, however, by reconciling the annual deferral and related employer matches, profit sharing contributions, etc. you can be made aware of any discrepancies or missed contributions before your audit.
  2. Ensure eligible compensation codes are in accordance with the Plan document. If your Plan Document and Provisions have not changed over the years, be sure to review all the payroll codes being aggregated to determine the participant’s eligible compensation is in-line with plan provisions. By failing to do so, a company runs the risk of deferring too much, or worse, not deferring enough based on the participant’s true eligible compensation.
  3. Reviewing your TPA’s SOC1 report. We’ve all seen the 70+ pages reports sent out every year from your TPA. Very rarely do we take the time to review these reports until its too late. If your TPA has received anything less than an Unqualified opinion from their auditors, this will usually result in additional audit procedures by your 401(k) auditors which will lead to increased audit fees. By reviewing the SOC1 reports on a timely basis, the plan administrator can reach out to their TPA to address any concerns stemming from the Qualified or Adverse opinion bestowed upon them.
  4. Reviewing internal processes and controls related to the plan. Well organized and well documented processes and controls concerning plan activity (detail review, authorized personnel, segregation of duties, etc.) are essential to ensuring plan data is complete and accurate. Best practices indicate an annual or bi-annual review of the current control structure is needed to ensure the controls still meet or exceed the appropriate level of risk for the entity. Your auditor can help you assess controls to ensure they meet auditing standards.
  5. Reviewing “Force outs” on terminated employees. It is not uncommon for participants to remain in the plan even after they are no longer employees of the company, but the point of emphasis here is to ensure the terminated participants remaining in the plan have a vested balance high enough to remain in the plan per plan provisions. For example, several plans have a “force-out” distribution requirement for any participants with a balance less than $5,000 at year-end. If this is the case with your plan, the next step is to attempt to contact these participants for further instructions on where to transfer their balances to (i.e. new employer’s 401(k) or an individual IRA). Best practice calls for an annual or bi-annual review of census detail to ensure all terminated participant’s balances are in accordance with the Plan provisions.

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By simply addressing the items noted in this piece, you can be well ahead of ball and on your way to a smooth 401(k) audit. For any concerns or questions about audit prep or possible mistakes, please be sure to reach out to your trusted Henry+Horne advisor or auditor.

For more information on how Henry+Horne can help you with your audit, head over to our Audit Services page.


Jesse E. Porras, CPA