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Who's Actually Performing Your 401(k) Audit?

You recently met the requirement that necessitated an audit of your 401(k) Plan. You reach out to your financial advisor, third-party administrator, or perhaps even Google around for a 401(k) Plan auditor. After speaking to the partner of a few firms that you discovered, including the review of their amazing marketing material, you finally choose a firm. The date is set for the auditor to come out and start the audit. To your surprise, the partner that was heavily involved during the auditor search is nowhere onsite during the audit.

Welcome to the modern world of public accounting, which occurs a majority of the time. Partners will woo you to allowing them to perform your audit, yet when the audit begins you see all new, fresh faces that setup shop in your conference room for days. These fresh faces may consist of staff auditors that have never performed a 401(k) Plan audit, but luckily there may be a senior or manager auditor that is with them to assist with their questions.

To the surprise of many, the majority of testing is performed by the newer staff auditors. This testing includes (but not limited to) eligibility, distributions (loans, if applicable), as well as deferral testing. It’s understandable why the majority of this testing is performed by the newer staff auditors. These tests can take some time to perform, which allows the senior or manager auditor to work on other parts of the audit without being disturbed by the staff auditors.

Some of the issues that can arise from having staff auditors perform these important tests can include:

  • Eligibility test: While looking through the I-9s to prove the date of hire and date of birth for the employees being tested, there are no date of hires on a few of the I-9s (but the staff auditor looks at another hiring form that proves the employees’ date of hire). Instead of informing the manager, they move on since they did prove the date of hires for the employees. This is huge mistake on the staff auditor’s part because missing I-9 information can cause a large fee if an ICE (Immigration and Customs Enforcement) investigation ever took place at the plan sponsor. Notifying the plan sponsor of this information at the time of the audit could spare them a large fee from ICE if an investigation ever took place (see more regarding I-9 documentation here:

  • Distribution test: While testing a hardship withdrawal, the staff auditor may see a 1099R and a request form filed by the participant and signed by plan management. The staff auditor assumes this is legit since the rest of the distributions they tested resembled this same documentation. What the staff auditor failed to do was to ask for the expense documentation for the hardship (such as a medical need, home foreclosure notice, back rent not paid and the threat of loosing their residence, etc.). If the plan sponsor does not have these needed documents upon a subsequent audit of the Plan by the DOL or IRS, then the Plan would have a qualification failure (see more regarding the proper documentation that needs to be retained for a hardship distribution here:

  • Deferral test: While the staff auditor is performing the participant deferral test, they assume that plan eligible wages are all W-2 wages. They go through the testing and notice that there are no variances while recalculating the deferral rates against W-2 wages, therefore they move on to the next part the manager assigned them. Unnoticed by the staff auditor, bonuses and commissions are not eligible plan wages as separately noted on the plan documents. Questioned by the manager while they perform a review of the test if they included bonuses and commissions (this is after the partner reviews it and notices the plan document notes the exclusion of the bonuses and commissions from eligible plan wages) in the wages they tested, the staff auditor (not wanting to redo their work or embarrassed if they missed something), tells the manager they believe that the payroll data they looked at excluded bonuses and commissions. Since they did not find any variances during their testing, the Plan will continue to withhold on commissions and bonuses, which is not compliant with the plan documents and a correction that should be made, is missed.

While trying not to scare anyone or step on any toes, this is the real world. Issues like the above can arise and cannot be ignored. Not all firms will have the above issues, but a few tips to consider when choosing a firm that will perform the audit with staff auditors are:

  • While interviewing the partner of the firm, ensure they have a heart of a teacher. Ask them how they educate and mentor their newer staff members that will be assisting with the audit. Listen to them closely to be sure the staff are receiving the needed coaching and advice they need to properly perform their tasks during a 401(k) audit.

  • Try to include the senior or manager auditor that will be in-charge of the audit during the interviewing of the firm partner. Get a feel for how they react to the same questions asked of the partner. Again, look for responses that indicate the heart of a teacher and coach.

  • Ask the partner and manager if they will be onsite so they can be readily available for quick responses to any questions that the staff auditors may impose. Having them onsite and ready for answers can be extremely important when it comes to being available to answer questions immediately, rather than having the staff call or email their questions in.

401(k) plans have a lot of moving parts and many compliance related issues can arise throughout the audit. Be sure to incorporate the above tips so you can be reassured your audit will be top notch.

And the companions, known as the 401k.9s

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