Mistakes to Avoid in Your Company’s 401(k) Plan Audit

By Michael Cecere, CPA, MST
Gray, Gray & Gray, LLP

If your company offers employees a 401(k), pension plan or other similar employee benefit plan, you are providing an important benefit. However, this benefit comes with strings attached.

Those strings are the complex and burdensome fiduciary responsibilities surrounding the management of a 401(k) and similar employee benefit plans. The U.S. Department of Labor (DOL) in particular is highly attuned to problems and abuses of employee benefit plans, and has the muscle to enforce compliance with their strict requirements.

As the primary government watchdog of 401(k) plans and the Employee Retirement Income Security Act (ERISA), the Department of Labor requires certain plans to be audited every year by a qualified independent Certified Public Accountant.

The annual audit of your plan provides assurance it is properly managed and free from abuse or misuse. As such, you want to be very certain that your annual 401 (k) plan audit is conducted properly, thoroughly and with scrupulous attention to detail. Any hint of error or deficiency could have the DOL knocking on your door, ready to issue heavy fines and penalties.

To that end, there are common mistakes many company plan sponsors and their auditors fall prey to on a regular basis. Audits are often found to be deficient because of the failure of the auditor to conduct tests in areas that are unique to employee benefit plans. An incomplete, inadequate, or untimely audit report may result in significant penalties being assessed.

Here are five areas of common mistakes that should be avoided during the annual audit of your company’s 401(k) plan.

  1. No Audit – As you might expect, the DOL really frowns on companies that do not submit an audit of their plan. Any business (public or private) with 100 or more active participants in a 401 (k) plan, with certain exceptions, must have the plan audited each year by an independent qualified public accountant as part of the plan’s annual tax filing (Form 5500).
  2. Asset Valuation – The value of the assets in the plan must be accurately stated. The auditor must confirm that the plan administrator has provided full documentation and test to ensure the valuation is fair and accurate.
  3. Contributions – The DOL wants to ensure any and all contributions into a plan, whether from an employee or the company, are properly recorded and reported. They are particularly focused on making sure payroll contributions from employees are being credited on a timely basis, and that payroll internal controls are in place and properly functioning.
  4. Benefit Payments – At the other end of the spectrum from contributions, your plan audit must also document benefit payments. Problem areas include proving eligibility for benefits and confirming receipt of benefit payments. The “paper trail” is particularly important here.
  5. Prohibited Transactions – The DOL is sensitive to conflict of interest issues and has a list of prohibited transactions that are intended to prevent abuse or misuse of the assets in the plan. While some prohibited transactions may be allowed upon appeal, your auditor must identify any possible transaction that could be in violation of ERISA rules.

While many company plan sponsors, plan trustees and audit firms view the annual plan audit as a necessary chore, a well-executed audit is vital for the protection of your 401 (k) plan. A quality audit plays an important role in protecting the assets and the financial integrity of your plan and in protecting the company and plan trustees against costly penalties and potential legal action. Therefore is in your best interest and that of your employees to conduct a thorough, reliable audit.

Michael Cecere, CPA, MST is a Gray, Gray & Gray partner. He can be contacted by telephone at (781) 407-0300, or via email at: mcecere@gggllp.com.

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