401(k) Audit Checklist

401(k) Audit Checklist. Preparing for a 401(k) audit is a difficult task for many businesses. From gathering the right documents to ensuring compliance with Department of Labor (DOL) and IRS regulations, staying organized is key to a smooth process. Whether you’re conducting your first audit or are a seasoned pro, having a comprehensive checklist of requirements will help ensure you're prepared. Below is a comprehensive break down the essential documents and steps you need to take for a successful 401(k) audit.

What is a 401(k) Audit and When is it Required?

A 401(k) audit is an annual review required for businesses with 100 or more eligible participants in their retirement plan (eligible participants, not necessarily active participants). The purpose of the audit is to ensure that the plan complies with regulations set by the Department of Labor (DOL) and IRS, including fiduciary responsibilities and proper management of contributions.

In addition to verifying contributions and distributions, the audit checks for fairness in the plan, ensuring that it benefits all employees equally, not just highly compensated employees. Employers must provide documentation such as plan amendments, compliance testing results, and Form 5500 filings to meet audit requirements. Failure to comply could result in penalties or plan disqualification, which is why ensuring you are prepared is critical.

401(k) Audit Checklist: What You Need to Prepare and File

Plan Documents

• Include the original 401(k) plan agreement and any amendments.
• Ensure the Summary Plan Description (SPD) is current and provide the Summary of Material Modifications (SMM) if there have been significant changes.
• Provide proof of fiduciary bond coverage, as required by ERISA, to protect against losses due to fraud or dishonesty.

Compliance Testing Results

• Gather results from non-discrimination tests to ensure the plan is not top-heavy.
• Provide records of annual coverage tests and Actual Deferral Percentage (ADP) tests to confirm fair contribution allocations.
• If your plan includes loans or hardship withdrawals, prepare documentation showing loan terms, repayment schedules, and participant paperwork.

Form 5500

• Include your Form 5500 filing for the year, along with any necessary schedules, such as Schedule H or I.
• Provide the previous year’s audit report for comparison purposes, if applicable.

Financial Statements

• Include a trial balance and general ledger for all plan accounts.
• Gather SOC reports from third-party providers, such as payroll or record-keeping services.

Service Provider Agreements

• Provide agreements with third-party administrators (TPAs), financial advisors, custodians, and any other service providers involved with the plan.

Employee Census Data

• Prepare a complete list of eligible employees, including hire and termination dates, compensation, and contributions.
• Include relevant employee documentation such as I-9 forms, enrollment forms, and deferral changes.

Payroll Records

• Provide payroll records showing how employee contributions were deducted and how employer matching contributions were applied.
• Include any adjustments made to contributions during the plan year.

Plan Fees and Expenses

• Gather documentation detailing investment management fees, administrative fees, and other related expenses to ensure they are reasonable.

Insurance and Fidelity Bond Coverage

• Include proof of adequate fidelity bond coverage, as required under ERISA, to protect the plan from losses due to fraud or dishonesty.

Fiduciary Oversight

• Identify the members of the plan committee responsible for overseeing the 401(k) plan, including trustees, investment managers, and key decision-makers.
• Document the periodic review cycle, detailing how often the committee reviews investment performance, plan fees, and overall compliance with fiduciary responsibilities.
• Ensure that records of committee meetings, including minutes from investment and fiduciary oversight discussions, are available as part of the plan’s fiduciary files.
• Correct Capital, as your plan’s advisor, will maintain annual review minutes and periodic meetings that occur during the year.

How Do I Fill Out Form 5500?

Form 5500 is an annual report must be filed for your 401(k) plan. It provides the IRS and Department of Labor (DOL) with information on the financial condition, operations, and compliance of your plan. Properly completing this form is necessary for avoiding penalties and ensure regulatory compliance. Here’s a detailed breakdown of the key components that must be included:

Basic Plan Information

• Plan Name and Number: Include your plan’s official name and its assigned plan number (usually 001 for the first plan).
• Plan Sponsor Information: Details about the sponsoring employer, including the company’s name, address, and Employer Identification Number (EIN).
• Plan Year Dates: Specify the dates for the plan year being reported.
• Plan Administrator Information: If the plan administrator is different from the sponsor, include their name, address, and contact details.

Financial Information

• Plan Assets and Liabilities: Provide detailed information on the plan’s assets (e.g., cash, investments, loans) and liabilities at the beginning and end of the plan year. This helps determine the financial health of the plan.
• Income and Expenses: Report total income, including employee and employer contributions, investment income, and other revenue. Also, list plan expenses, including administrative and operational costs, as well as any benefit payments made during the year.
• Transfers: Include any transfers of assets in or out of the plan during the year, such as mergers with other retirement plans.

Participant and Benefit Information

• Number of Participants: Report the total number of participants at the beginning and end of the plan year. This includes employees eligible to participate, regardless of whether they are actively contributing.
• Breakdown of Active Participants: Include details on the number of active, terminated, retired, and deceased participants with remaining balances in the plan.
• Eligibility Criteria: Indicate the criteria used to determine who is eligible to participate in the plan.

Plan Operations and Compliance

• Contributions: Break down both employee and employer contributions, including any matching contributions. Be sure to include deferrals, catch-up contributions, and any other elective deferrals.
• Loan Information: If the plan allows participant loans, provide details on the number of outstanding loans, amounts, and repayment schedules.
• Distributions: Report any distributions made to participants, including rollovers, hardship withdrawals, and retirement payouts.

Schedules

• Schedule H or Schedule I: Larger plans (generally those with more than 100 participants) must file Schedule H, which requires detailed financial statements, including assets, liabilities, income, and expenses. Smaller plans (with fewer than 100 participants) can file Schedule I, which provides simplified financial reporting.
• Schedule C: Required for plans that pay more than $5,000 in fees to service providers, such as administrators, financial advisors, or recordkeepers. It outlines the fees paid and the services provided.
• Schedule A: If the plan includes insurance contracts (such as for annuities or insurance policies), Schedule A must be attached, detailing insurance premiums and coverage specifics.

Plan Amendments and Changes

• Amendments: If any changes or amendments were made to the plan during the year, include details in the Form 5500. This ensures the form accurately reflects the current state of the plan.
• Plan Terminations or Mergers: If the plan was terminated, merged, or underwent any significant changes, this information must also be reported.

Fiduciary and Governance Information

• Fiduciary Information: Identify all fiduciaries responsible for the oversight of the plan, including trustees and investment managers.
• Plan Governance: Include records of any meetings held regarding the administration of the plan, including minutes from plan investment committee meetings.

Call Correct Capital For Help With Your 401(k) Audit

A successful 401(k) audit begins with thorough preparation. By following this checklist and staying organized, you can ensure that your business is fully prepared for the upcoming audit season. Remember, the right support can make all the difference. If you need assistance getting through the process, reach out to the experts at Correct Capital. We’re here to help make your audit as seamless and stress-free as possible. You can schedule a meeting with a member of our advisor team, contact us online, or call us at 877-930-401(k) to get started.