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Many organizations that offer 401(k) plans are required to have them audited to ensure they are being run correctly and are compliant with Internal Revenue Service (IRS) and Department of Labor (DOL) rules. While the word “audit” may invoke images of steely-eyed accountants poring over documents to uncover wrongdoing, a good retirement plan audit actually is a value-add that helps safeguard plan participants’ retirement income and protect a company from the financial penalties that come with non-compliance issues.

Some companies, though, aren’t getting the most out of this yearly process. Choosing an inexperienced firm to perform the audit because the fees are low is a commonplace way companies drop the ball on uncovering plan deficiencies that could increase the odds of government scrutiny.

According to the American Institute of CPAs, independent audits of employee benefit plan financial statements are an important accountability mechanism. A financial statement audit provides an independent, third-party report to participants, plan management, the DOL and other interested parties that indicates whether the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits.

The audit also may help management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or operational errors. In addition, the audit helps the plan administrator carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.

All 401(k) plans can be audited by the DOL

No matter how large or small, all 401(k) plans can be audited by the DOL. Findings of wrongdoing can lead to stiff penalties for fiduciary breaches, excise taxes for late deposits and even disqualification from the plan.

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With regulations regularly changing, it is a good time to have an experienced accounting and advisory firm check your 401(k) audit process to make sure you can answer these key questions to avoid the most common plan administration mistakes and keep government auditors at bay.

Are you aware that the DOL requires timely contributions?

The government agency requires that an employer remit employee contributions to the plan “on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets, but in no event later than the 15th business day of the month following the month in which the amounts were paid or withheld by the employer.” However, the DOL may enforce an earlier date depending on how soon you demonstrate you actually can remit the employee contributions. Developing a consistent policy for remitting employee contributions is of utmost importance.

Untimely remittance of employee contributions is considered an interest-free loan from the plan participants to the employer and can carry penalties that amount to 15% of the earnings that the late contributions would have generated each year, compounded annually. This penalty, according to Benefits Law Advisor, jumps to 100% of the foregone earnings if the IRS finds the untimely remittance before the employer remits the employee contributions and required earnings to the plan.

Do you understand the fidelity bond requirements?

The Employee Retirement Income Security Act of 1974 requires those who handle 401(k) plans to carry a fidelity bond to protect the plan against losses related to fraud or dishonesty by plan fiduciaries.


Failing to report a sufficient bond on Form 5500 is unlawful, can trigger a plan audit and can cause 401(k) fiduciaries to be held personally liable for losses that the bond would have covered.

Are you in compliance?

Independent audits often reveal that fiduciaries may be out of compliance with a variety of regulations like fidelity bond coverage. Other common findings in audits include:

  • Omission of required documentation for participant hardship distributions.
  • An overall lack of awareness and/or performance of plan administrator fiduciary responsibilities relative to plan participants.

These problems typically result from the plan fiduciary’s challenges in both understanding and applying complicated regulatory guidelines.

Are you documenting your fiduciary responsibilities?

The DOL lists the following as the responsibilities of a 401(k) fiduciary:

  • Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them.
  • Carrying out their duties prudently.
  • Following plan documents.
  • Diversifying plan investments.
  • Paying only reasonable plan expenses.

It’s important for a company to formally document the processes it undertakes to meet these responsibilities.

Is the plan operating as intended?

Some companies have been administering the same 401(k) plan for 30 years or more, which means the original adoption agreement that outlined the plan’s specific features might be outdated. According to the IRS, a yearly review by an experienced accounting firm will allow the plan to run smoothly and remain qualified for tax benefits.

Plans can be amended to change the definition of compensation, hardship withdrawal provisions, loan provisions and contribution or allocation formulas, for example.

All audits are not created equally

The DOL is clearly on the side of employees when it comes to overseeing how companies administer their 401(k) plans. That’s why it’s important that business leaders understand that not all audits are created equally.

According to the American Institute of CPAs, reviewing the auditor’s qualifications is a critical step in selecting a plan auditor. It requires the consideration of licensing and independence rules as well as the auditor’s experience and professional development, including specific employee benefit plan audit experience and continuing professional education.

A quality audit performed by a firm that understands the uniqueness of employee benefit plan reviews can help protect participants and keep the company in compliance, which, in turn, protects its bottom line.