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According to a recent Glassdoor survey, 90% of younger workers ages 18 to 34 years old say they would prefer benefits over pay, with retirement plans taking three out of the top five spots in benefits that have the highest correlation with employee satisfaction. As a result, a 401(k) plan serves as a tool to both attract and retain talent as it shows an interest in the employees’ financial well-being, even into retirement. Let’s just say that a 401(k) plan is an important item to have in your benefits toolbox! With the establishment of a 401(k) plan comes administrative responsibilities for Plan Sponsors. One of these responsibilities is monitoring the plan’s need for an audit.

What triggers an audit? These are the 3 factors to monitor.

Plan audits are triggered by participant counts. While this sounds pretty straight forward, it is a little more complex than it sounds. When the Form 5500 instructions start throwing in the term “eligible,” numbers like 100 and 120, and a measurement date, people are left scratching their heads or phoning a friend.

When I get those calls, I typically walk people through the following three factors of the 401(k) audit decision tree:

Factor 1: Participant counts

There are three groups of participants to include in this count:

  • Eligible and participating
  • Eligible and not participating (i.e., eligible meaning conditions are met as described in the Plan Document)
  • Termed or deceased participants with plan account balances

An accurate participant count is a critical component to the audit determination. The Company’s census file will provide the information needed to determine a) and b) above. Plan records can be used to determine c) above. Your third-party administrator should also be a partner in helping you accurately report these participant counts on the Form 5500 each year.

Factor 2: Measurement date

The measurement of the above participants for audit determination is the first day of the plan year (e.g., January 1st if a calendar year-end). If the plan is newly created during the year, the measurement date is the date the plan was established.

Factor 3: Magic number

An audit is required if the plan has over 100 participants using the count criteria above if it is a newly created plan. If an existing plan exceeds 100 participants, it can apply the 80-120 rule. The 80-120 rule states that if the plan has between 80 and 120 participants, it can elect to file the same status as the prior year. In other words, if you filed as a small plan and did not have to do an audit last year and have between 100 and 120 participants in the current year, you can file again as a small plan, eliminating an audit requirement; if you filed as a large plan and therefore had an audit, you cannot change your filing to a small plan unless you drop below 100 participants.

However, once the plan exceeds 120 participants, it must have an audit. Typically, we see existing plans requiring an audit once the plan passes 120 participants (or 100 if a newly created plan). The audit requirement will continue each year in the future as long as there are 100 eligible participants as determined above. If a large plan filer (audit requirement) drops below 100 participants, it no longer has an audit requirement. However, if a plan has a temporary drop below 100 participants (e.g. for maybe one year), management may want to consider continuing the audit in order to avoid additional fees associated with procedures to audit opening plan balances when the plan requires an audit once again.

Two Tips on How to Avoid 401(k) Plan Audit Issues

#1: Monitor audit triggers closely

It is in the best interest of Plan Sponsors to keep an eye on these audit triggers. If the plan is under-reporting the number of participants, the plan can incur costly penalties for incomplete filings when audit reports should have been attached to the Form 5500. If the company is growing closer to the 100 or 120 participant count, the company can save money by monitoring these counts and performing “clean-ups,” if necessary.

Consider the following two “clean-up” tips for delaying an audit requirement:

  • Often, audits can be triggered by separated (terminated or deceased) participants still carrying account balances that are included in the participant count. Plan Sponsors can review their Plan Document for “force-out” provisions and ensure that these are being followed by the third-party administrator in order to keep participant counts below the audit threshold.
  • We have also encountered companies offering incentives (e.g., gift cards) to separated participants who roll their balances out of the plan in a timely manner.

These small investments of time and money can pay off big time when avoiding audit fees.

#2: Work with a third-party administrator to address merging plans

Finally, one of the biggest points of confusion that I see is when plans are closing via a merger with another plan. Plan management may select December 31st or January 1st as a preferred date for closing the plan. What I often see is that the Plan has operations for the first few days in January (due to timing of fund liquidation and wires).

Since an audit requirement is determined based on the first day of the plan year, this activity, while limited, can still trigger an audit requirement for those few days of activity, known as a stub period. This stub period audit can be unexpected when the plan has chosen to liquidate funds on December 31st, thinking they have picked a date that cleanly closes the plan. I recommend working with the third-party administrator or custodian to ensure all account balances will be $0 and all cash will be wired at the close of business on December 31st in order to avoid additional audit fees for a stub period audit.

Don’t Be Afraid to Ask for Help

Yes, there are a lot of stipulations to consider here, but you are not alone when trying to determine if your plan has met the requirements for an audit. Your Form 5500 preparer is required to include these counts annually and should work with you to ensure this reporting is accurate. In addition, even if your plan does not have an audit requirement, independent accountants can perform plan “check-ups” (mini-audits) to ensure plan provisions are being followed and reporting is accurate. These check-ups have been extremely beneficial for our clients to either correct issues prior to an audit requirement or have peace of mind knowing that their plan is being administered according to the Plan Document and regulations.

Final Thoughts

In growing companies, 401(k) plans can sometimes be on auto-pilot before suddenly grabbing your attention with an audit requirement. Familiarizing yourself with the audit requirement triggers and even how to manage the plan to delay the requirement as long as possible is a good discipline for all Plan Sponsors. Plan administration is much easier when you surround yourself with a support team such as a third-party administrator, investment advisor, plan consultant, independent auditor, and ERISA counsel. They can all be part of ensuring an audit requirement doesn’t catch you by surprise.


 

Candace Jackson is is a Director in Moore Colson’s Business Assurance Practice. She manages audit and review teams and serves as a Practice Area Leader in the firm’s Employee Benefit Plan Practice.

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