Another year end has passed and now you are probably compiling and sending the 401(k) files to your third party administrator for them to complete their compliance testing, and other plan financial reports. Many of these documents will then be requested by your 401(k) plan auditor. Additionally your auditor will be requesting other Plan documents such as the following items: Plan document and amendments to the Plan document; the Adoption Agreement or Amendments to the Adoption Agreement, and the Summary Plan Description (SPD) or an amendment to the SPD. Your auditor probably had these same requests during the prior year audit. So why does he/she need to ask for this information each year, if nothing significant has changed?
The reason for these annual requests is that your auditor is required to ensure that the financial statements have the required footnote disclosures. As such, changes to your Plan documents will affect these disclosures. Some examples of footnote disclosures that need to be updated, or considered for update yearly are:
• General description of the Plan including description of contributions, distributions, vesting requirements, forfeitures, participant loans, basis of accounting, etc.
• Tax Status
• Related Party and/or Party-In-Interest
• Plan Termination Rights
• Reconciliation of the Financial Statements to the Form 5500
• Subsequent Events
• Investments over 5% of Net Plan Assets
• Other as deemed necessary to report the significant activities and operations of the Plan.
Additionally, an auditor can add significant insight and support to ensure that you (as Plan administrator) are administering your Plan in accordance with the most recent Plan Document (or amendments). A value-added auditor will also be able to inform you of new legislative or regulatory updates that your Plan should be aware of, or that your Plan is missing in the Plan documents.
Finally, an auditor should be reviewing your most recent plan documents to ensure your Plan does not fall into some of the more common 401k plan deficiencies such as:
• As noted above – a plan isn’t operating as the Plan is documented
• Inaccurate definition of compensation, which can cause inaccurate contributions or matching contributions
• Not refunding excess contributions in accordance with IRS regulations.
• Not offering participation to individuals that are eligible to join the Plan.
• Not following the rules of your auto-enrollment feature
• Not properly administering distributions including hardship distributions.
Here at Henry & Horne, we are not only concerned with ensuring your financial statements have the most updated required financial statement disclosures, we also are concerned with helping you (as Plan Administrator) obtain some comfort that you are administering your Plan in accordance with your Plan document, and in accordance with regulatory requirements. We help provide comfort to you (as Plan Administrator) by taking the time to carefully read your Plan documents for understanding and ensuring consistency with your Plan operations, and by being able to offer best practices performed by other 401(K) plans.
If you have any questions on your Plan’s financial statements, or Plan documents, please feel free to contact us by posting a question to this blog, or by using the contact information on our main webpage.