Navigating Your 401(k) Audit

Danielle Gisondo, CPA

Marilea Campomizzi, CPA

Rebecca Ferris, CPA

March 24, 2015

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• Who needs an audit?

• What is the audit process?

• How will I ever be ready?

• How can we wrap this up?

AGENDA

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Who needs to have a plan audit?

Generally an employer that has over 100 eligible

participants as of the beginning of the plan year needs to

have an annual audit

Exceptions for employers with between 80 and 120

eligible employees

Eligible is the KEY term

Employers are required to engage an IQPA

These plans are considered large plan filers

WHO NEEDS AN AUDIT?

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TYPES OF PLANS

Defined Contributions Plans

• Provide individual account for

each participant

• Benefits based on amounts

contributed by EE and ER and

investment experience

• Examples are 401(k), profit

sharing, money purchase, stock

bonus, ESOP, 403(b), 457(b)

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TYPES OF PLANS

Defined Benefit Plans

• Do not have individual accounts for

each participant

• Promise to pay a specific benefit

determined by a formula in the plan

document based on age, years of

service and compensation

• Examples are traditional pension

plans and cash balance plans

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Health and Welfare Plans

• Plans that provide medical, dental, vision, insurance,

post-employment/severance benefits, sick leave,

dependent care, post-retirement,

supplemental unemployment

• Can be either a DC or a DB plan or have attributes

of both

• Generally if a trust exists, the plan has an

audit requirement

TYPES OF PLANS

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Audited financial statements must be

included with the Form 5500 filing

• Original due date is 7 months after the

plan year end

• For calendar year end plans, original

due date is 7/31

• Can obtain an extension of 2 ½ months

• Extended due date is 10/15 for

calendar year end plans

AUDITED STATEMENTS

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PLAN EXEMPTIONS

PENSION BENEFIT

• Exemption from 5500 filing and audit requirement

Plans that are unfunded or fully insured and provide benefits to a

select group of management or highly compensated EE’s

• Exemption from audit requirement only

Plans whose sole assets consist of insurance contracts fully

guaranteed by the insurance carrier

Plans funded by premiums paid out of the general assets of the

employer, or a combination of general assets and employee

contributions

Forward participant contributions within 3 months of receipt

and provide for return of refunds within 3 months of receipt

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PLAN EXEMPTIONS

WELFARE BENEFIT

• Exemption from 5500 filing and audit requirement

Plans that are unfunded or fully insured and provide benefits to a

select group of management or highly compensated EE’s

Plans under 100 eligible participants that meet

requirements below…

• Exemption from audit requirement only

Plans whose sole assets consist of insurance contracts fully

guaranteed by the insurance carrier

Plans funded by premiums paid out of the general assets of the

employer, or a combination of general assets and employee

contributions

Forward participant contributions within 3 months of receipt

and provide for return of refunds within 3 months of receipt

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• Planning for the audit usually begins in

April/May

• Fieldwork in June, July and August

• Draft financials issued once fieldwork

is complete and draft 5500 form

is received

• Typically spend 2-3 days in the field

performing the audit

AUDIT TIMING

What is the

Audit Process?

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Limited Scope Audits

• If plan sponsor receives a trustee certification from a

qualified trustee or custodian, it exempts auditors from

needing to test investment balances and activity

Full Scope Audits

• Everything in the plan is subject to audit testing

AUDIT PROCESS

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What do we test during a plan audit?

Financial Information and Compliance

Contributions

Participant accounts

Distributions

Loans

AUDIT PROCESS

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TESTING

CONTRIBUTION

What are we testing?

Contributions must meet the following requirements:

Calculated in accordance with the plan document

Allocated appropriately to the respective participant accounts

Agreed to payroll records

Reduced properly by forfeitures

Adjusted to account for receivables

Remitted timely to the trust

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TESTING

CONTRIBUTION

Timely Remittance of Employee Deferrals

• ERISA requires plan sponsors to remit employee

deferrals to the plan at the earliest date that such

amounts (contributions and loan repayments) are able to

be reasonably segregated from the employer’s

general assets

• 15th business day – Not a safe harbor

• What is a “reasonable” time period?

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PARTICIPANT TESTING

For a sample of participants we audit:

• Eligibility and enrollment process

• Withholdings

• Investment allocations

• Employer contributions

• Compensation

• Account activity reasonableness

• Testing for fictitious employees

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PARTICIPANT TESTING

What are we testing?

• That participants are properly included and/or excluded in the plan (based on the plan’s provisions)

• That if the participant is eligible, the individual is allowed to enter the plan at the appropriate time and that their elections are being followed

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• Plan document specifies eligibility requirements (who is

in and who is out)

• May be more generous than ERISA minimum standards:

One year of service

Age 21

• If the plan document requirements are more generous

than ERISA standards, then the plan document must be

followed.

ELIGIBILITY

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• Eligibility requirements may vary for

different contribution types to the

same plan (e.g. participant, ER

match, ER profit sharing)

• A participant must be allowed to

enter the plan within six months of

satisfying the eligibility

requirement(s)

ELIGIBILITY

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• Percentage of compensation or fixed amount per pay

elected by participant matches payroll withholdings

• Consider the following:

Hire date versus plan entry date

Changes in deferrals during the plan year

Leaves of absence

Hourly versus salary paid employees

IRS limitations

‒ $18,000 and $17,500 for 2015 and 2014 (EE deferrals)

‒ $6,000 and $5,500 for 2015 and 2014 (Catch up contributions)

WITHHOLDINGS

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• Deferrals are invested in

correct investment options at

correct allocation percentage

• Consider the following:

Changes in investment elections

during the year

Current year contributions versus

participant account balances

Frequency of investment

elections; electronic options;

availability of historical tracking

INVESTMENT ALLOCATIONS

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• Employer match recalculation

• Profit sharing contributions

• Consider the following:

Different eligibility requirements, timing

IRS limitations - lesser of

‒ 100% of participant’s compensation or

‒ $53,000 and $52,000 for 2015 and 2014 (includes deferrals,

matching, non-elective contributions, allocations of forfeitures, etc.)

EMPLOYER CONTRIBTIONS

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• Total compensation subject to income tax may not be the

same as Plan compensation

• Plan document will define compensation and any

adjustments/exclusions such as:

Bonuses

Commissions

Holiday/vacation pay

Severance payments

Tips

COMPENSATION

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What are we testing?

• Verify salaries and pay rates to agreements, contracts

and pay authorizations

• Examine time cards, attendance sheets

• Recalculate compensation

COMPENSATION

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For a sample of distributions we audit:

• Authorization

• Participant’s elections

Taxes withheld, if applicable

Lump sum vs annuity

Direct payment vs rollover

• Eligibility

• Timeliness

• Distribution amount based on type and vesting

DISTRIBUTION TESTING

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LOAN TESTING

• The plan document will state if

participant loans are allowed and

describe any restrictions

• Loan accounting and compliance is

typically performed by

trustee/custodian or record-keeper

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LOAN TESTING

What are we testing?

Loans must meet the following requirements:

Made to plan participants with account balances

Requested and authorized by participant

Properly recorded by the plan and allocated in the appropriate

participant’s account

Repaid in the correct amount and payments are remitted timely to

the Plan

Issued and repaid in amounts that do not exceed IRC or

Plan limits

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LOAN TESTING

Regulatory Limits

• Maximum loan is the lesser of $50,000 or ½ of the

participant’s vested account balance at date of issuance

• Repayment term – no more than 5 years

Exception = purchase of participant’s primary residence

• Timely remittance consistent with employee contribution

requirements

• Plan document must include loan provisions

How will I ever

be ready?

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FIRST AUDIT

PREPARING FOR YOUR

1. Read, understand and follow your Plan Document

2. Get all plan records in one place

Plan document

Adoption agreement

Amendments

Summary Plan Description

IRS/DOL communications

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FIRST AUDIT

PREPARING FOR YOUR

3. Maintain detailed records for employees

Include in employee files any plan related forms

‒ Enrollment form or opt-out

‒ Substantiation of date of birth, date of hire, and salary

‒ Loan application, promissory note, amortization schedule and copy

of check or wire transfer

‒ Distribution request, copy of check or wire transfer

‒ Support for hardship distribution (medical bills, foreclosure notice)

Get employee requests in writing

‒ Change in deferral %

‒ Starting/stopping deferrals

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FIRST AUDIT

PREPARING FOR YOUR

4. Make sure remittances are made

timely

Create a consistent routine for

remittances

‒ Same day every pay period

Maintain records of contributions to the

plan

‒ Print confirmations when submitting

‒ Keep payroll information and other

worksheets

‒ Make notes of any adjustments made if

amounts contributed are different from

employee withholdings

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FIRST AUDIT

PLANNING YOUR

5. Memorialize important items

Keep minutes for meetings of

trustees and/or fiduciaries

Document changes made to plan

and how these changes support

fiduciary responsibility

Document regular review of plan

performance

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FIRST AUDIT

PLANNING YOUR

6. Take control of recordkeeping when you change

service providers

In year of change…

‒ Review information timely

‒ Keep all records in one place - - your auditor will need to see records

from before and after the change

If you are changing third party administrator

‒ Request documentation for all outstanding loans (promissory notes,

checks, etc) - - this is a common area of deficiency

If you are changing payroll provider

‒ Be sure you maintain detail of payroll by employee for all pay periods

in the Plan year

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FIRST AUDIT

PLANNING YOUR

7. Address issues early

Notify TPA and auditor as soon as you discover missed

remittances and other errors

8. Engage an auditor early in the process and establish an

open dialog

9. Do not wait until September to get started

Audit from start to finish is minimum of 6 weeks

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WILL THIS TAKE?

HOW MUCH OF MY TIME

Average time for client personnel (initial year)

• Prior to audit: 8-12 hours

Sending Plan documents to auditors

Preparation of confirmation letters

Gathering requested documentation for fieldwork

• Audit fieldwork: 2-3 days

Auditors at office; schedule on days when you are fully accessible

• After fieldwork: 2-8 hours

Additional questions

Review of financial statement draft

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AUDIT PROCESS

Your auditor will need what is known as the “Audit

Package” from your service provider

• Certification that records are complete and accurate

• Overall plan balances and transaction information

• Information regarding Fair Value of Investments

• You will be responsible for getting audit package

Tip: Giving your auditor access to

Plan’s website saves everyone time.

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FAIR VALUE

• Required disclosure of Plan’s investments

• Separated by how easy it is to value the investment

Level 1 – investments are identical to those traded in an active

market (registered investment companies, mutual funds)

Level 2 – investments are similar to those found in an active

market (pooled separate accounts)

Level 3 – valuation methodology is unobservable (private

company stock, guaranteed investment contracts)

• Audit package will include recommendations on how to

value; plan sponsor needs to represent that they take

responsibility for the disclosure

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INFORMATION

ADDITIONAL FIRST YEAR

• For your initial year only, your auditor will have to audit

“beginning balances”

If you hit the audit requirement threshold in 2015, you will require

an audit for the 12/31/15 year end. Your auditor will look at

12/31/14 information to gain comfort with 1/1/15 balances.

It’s never too early to start maintaining good records

• Audit requires documentation of processes and internal

controls

Consider documenting prior to the audit and keeping on file

How can I

wrap this up?

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CLOSING PROCEDURES

WRAP UP

Financial Statement Issuance

Draft Financials

Read through and make sure

consistent with Plan

Verify accounting firm has agreed to

Form 5500

Approve

Have access to electronic copy to

attach to Form 5500 if needed

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CLOSING PROCEDURES

WRAP UP

Form 5500 Procedures

• TPA will send a questionnaire with various plan questions

usually during Q1

• Draft 5500 usually available a few months after questions

are submitted

• Once approved either company or TPA is responsible for

electronic filing

• Don’t wait until the last minute to get e-filing credentials

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CLOSING PROCEDURES

WRAP UP

Management Representation

• Accounting firm will ask for a

management representation

letter

• Should be signed by plan

administrator or person

performing the plan’s

management functions

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CLOSING PROCEDURES

WRAP UP

Required Communications

• Auditor has a responsibility to communicate with those charged with governance, should be in writing

• Requirement to communicate with the applicable parties relating to specific matters (significant difficulties or disagreements with management)

• Communication should be to the person responsible for overseeing the strategic direction of the entity, including the financial reporting process

• Auditor should be communicating their responsibilities, overview of scope and timing, uncorrected misstatements and significant findings

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CLOSING PROCEDURES

WRAP UP

Significant Findings/Internal

Control Recommendations

Auditor should communicate

the following:

Misstatements noted

Significant findings

Internal control related matters

Opportunities for improvement for

the next year

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CONCLUSION

• Who needs an audit?

Plan size

Types of plans

• What is the audit process?

Compliance with plan

document

Current year plan activity

• How to prepare for your

first audit

Understand your plan

document

Keep adequate documentation

• Wrap-up

Financial issuance

5500 filing

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Dani Gisondo, CPAPartnerdgisondo@skodaminotti.com

QUESTIONS?

Rebecca Ferris, CPA

Manager

rferris@skodaminotti.com

Marilea Campomizzi, CPA

Senior Manager

mcampomizzi@skodaminotti.com

www.skodaminotti.com

440-449-6800