401(k) Audit Prep
It’s time to start thinking about your annual 401(k) audit. As non-discrimination testing comes to an end (hopefully), you likely have the majority of documents necessary to begin this process. Most people I know cringe a bit when they hear “audit”, but that shouldn’t be your experience. Their job is simply to make sure the plan is operating as it should. With a skilled advisor and service provider in your corner, this can go smoothly for you and the auditor.
First Time Audit?
Historically, you needed to have a third party audit conducted once your plan has 121 participants that were active, eligible, or terminated with a balance at the beginning of a plan year - and this will hold true for your 2022 audit. However, new rules will be in play for the 2023 plan year that will require an audit if you have more than 100 participants with balances at the beginning of the plan year. The new rule eliminates counting those that are eligible to participate, but are not.
For now, the 2022 audit, you’ll need to use the same old rules. The easiest way to check this is to pull your 2021 Form 5500, go to the second page and look at line 6f (i.e. Part II, 6f).
If you’re at 121 or more, it’s time to find an auditor. If you’re not sure where to go, it’s a good idea to ask around. Ask your current advisor, accountant, or recordkeeper/TPA. Finally, be ready to budget an expense you’ve not encountered before when it comes to your plan, likely around the $10,000 mark. Check your forfeiture balances to see if there is money that can help offset the expense before writing that check!
Scheduling
If you’ve used an auditor from a prior year and you wish to use them again this year, reach out to your point of contact to see when they can begin the process. People often change jobs, so if you can’t get in touch with the person from last year, call the main office. Historically, I have seen audits begin in July (for plans on extension on a 12/31 plan year end) and run all the way up to the filing deadline of October 15th.
Documents Needed
While you’re discussing a time to schedule, it’s also a good idea to ask them for a list of documents they would like to see when they begin. It’s so much easier to collect these over several weeks vs a few days. Many of the items are provided by the recordkeeper/TPA/trustee. However you will likely have some work to do in gathering documents from your side.
A good fiduciary advisor should have a file from the previous year containing a chunk of the data that may be needed. If not, you’ll want the plan documents, non-discrimination testing data, employee census, fidelity bond coverage, amendments, fund changes, participant notices, and fee disclosures (404(a)(5) and 408(b)(2)). You’ll also be asked for a sampling of payroll data, but just wait until they provide the sample request.
Teamwork
Be ready to dialogue. Having a point of contact for your company to work with the auditor is extremely important in discussing the events that happened over the past year. This is not something you can outsource, but your advisor and TPA should be along for the ride to help where possible!
Your service providers may also have the ability for the auditor to login to the provider’s portal, view a reporting package, run additional reports as necessary, and seek clarification from the provider. This is valuable and helps take you out of the middle!
Finally, please remember it’s an auditor’s job to review what you should be doing compared to what you actually did. They are not out to get you or looking to cause problems. Your 401(k) is a highly regulated program that requires meticulous attention to detail. An auditor can be a valuable part of your retirement plan team to make you more efficient and compliant.
If you’re having trouble with this process please feel free to reach out by email or click the schedule meeting button at the top of the page. I’m always happy to discuss how you can improve your 401(k) plan and reduce the amount of time and work you spend on it!