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1 @DHGLLP Preparing for Your First 401(k) Audit April 24, 2020
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@DHGLLP
Preparing for Your First 401(k) AuditApril 24, 2020
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@DHGLLPContacts
Luke MartonikPartner, DHG Assurance
Jennie MunizManaging Director, DHG Assurance
Amy HilliardManaging Director, DHG Assurance
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@DHGLLPAgenda
• Audit Requirements
• Selecting an Auditor
• Planning for the Audit
• Audit Procedures
• Common Errors
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@DHGLLPImportant Considerations
• What is the audit requirement?
• Who is counted as a participant?
• When is the deadline?
+ last day of the seventh month after the plan year ends (July 31 for a
calendar-year plan) with an optional 2 ½ month extension (October 15 for
a calendar-year plan)
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@DHGLLPQuestion #1
Does your 401k Plan require an audit?
+ Yes
+ No
+ Maybe
+ N/A
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@DHGLLPWhy is an Audit Important?
• Identifies:
+ Control weaknesses
+ Operational errors
• Provides reliable information to assess the plans financial condition
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@DHGLLPHow to Select an Auditor
• “The Importance of Hiring a Quality Auditor”
– AICPA Employer Benefit Plan Audit
Quality Center
• www.aicpa.org
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@DHGLLPEvaluating Auditor Qualifications
• Identifying quality audit firms
• Experience and professional development
• Licenses
• Independence
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@DHGLLPFirst Time Audit - The Planning Process
• Preparing for the audit:
1. Plan document
2. Participant history
3. Processes and procedures
4. Other considerations
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@DHGLLPQuestion #2
When was the last time you reviewed the plan document and adoption
agreement?
+ Within the last year
+ More than a year ago
+ Never
+ I’m not sure what these are
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@DHGLLPFirst Time Audit – Plan Document History
1. The Plan document: consider the effective date of the Plan and gather the
following documents:
+ Basic plan document, plus adoption agreement and amendments
+ IRS determination letter
+ Summary plan description
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@DHGLLPFirst Time Audit - Participant History
2. Participant history:
+ Locate and maintain participant account balances at the beginning of the
year.
+ Maintain enrollment and deferral change forms (or electronic history).
+ Maintain documentation supporting distributions.
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@DHGLLPFirst Time Audit - Processes & Procedures
3. Processes and procedures
Hire:
Eligibility Enrollment
Active:
Contributions
In-service distributions
Loans
Inactive:
Distributions due to death,
disability, or termination
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@DHGLLPFirst Time Audit – Processes & Procedures
• Hire:
+ How is an employee informed about the Plan?
+ When is an employee eligible to contribute?
• Active:
+ Contributions:
• How do employee contributions get withheld?
• How are employer contributions calculated?
• How do the contributions get to the plan?
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@DHGLLPFirst Time Audit – Processes & Procedures
• Active (continued):
+ In-service distributions:
• If hardships are allowed, under what circumstances?
• Are distributions allowed for the actively employed? (age 59 ½, age 70
½, disability, or length of service)
+ Loans:
• Are they allowed?
• Who processes the documents and ensures repayment is made?
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@DHGLLPFirst Time Audit - Processes & Procedures
• Inactive:
+ How are distributions requested and processed?
+ Who ensures that vesting is properly calculated?
+ Are forfeitures used annually?
+ Are force outs processed regularly?
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@DHGLLPFirst Time Audit – Other Considerations
• Use of a third party service provider:
+ Do you understand the extent of services provided within service
agreement?
+ Have you implemented “user controls”?
• Minutes-primary function is to document fiduciary care:
+ Do you have an investment policy? Are investment options reviewed
periodically?
+ Are fees reviewed for reasonableness?
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@DHGLLPQuestion #3
Do you let part-time employees participate in the 401k plan?
+ Yes
+ No
+ Not sure
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@DHGLLPThe Audit Package Includes
• Limited scope certification letter
• Schedule of investment activity – plan level
• Schedule of investment activity – participant level
• Schedule of contributions received
• Loan schedule
• Schedule of distributions paid
• Service auditors’ report (SOC 1 report)
• Schedule of fees paid
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@DHGLLPDocuments Requested that are Maintained Within the Organization
• Year-to-date payroll summaries
• Employee listing (census)
• Payroll registers for each pay period
• Employee documentation for each testing area:
+ Eligibility: personnel files
+ Contributions
+ Distributions
+ Loans
+ Plan level contributions
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@DHGLLPWhat do we do with this information?
• Test it!
• Types of testing:
+ Eligibility
+ Loans
+ Contributions (participant/plan level)
+ Distributions
+ Administrative expenses
+ Investment allocation
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@DHGLLPCommon Errors Found
• Eligibility
• Loans
• Contributions (participant level)
• Contributions (plan level)
• Distributions
• Investment allocation
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@DHGLLPCARES Act and Other Relief
• Plan participants level
+ Distributions – waiver of 10% penalty if under 59½ on amounts up to $100,000
for Qualified Individual (self-certification)
• Elect to not repay – included in gross income over 3 years for taxes
• Elect to repay – have 3 years to repay
+ Loans – lesser of $100,000 or up to 100% of vested balance for any loan made
during 180-day period beginning March 27, 2020
• Delayed repayment of outstanding loans on or after March 27, 2020 to
December 31, 2020 for one year
+ Minimum distributions to commence in 2020 to be waived to commence in 2021
+ Participants have access to hardship and in-service distributions if they do not
meet requirements above
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@DHGLLPCARES Act and Other Relief, Cont’d.
• Plan level
+ Safe harbor matching or non-elective contributions for 2020 can be suspended if employer meets either:
• Business operating at an economic loss; or
• Employers included a statement in annual Safe Harbor notice that contribution might be reduced or suspended during the year
+ Advance 30-day notice must be given prior to suspension and plan becomes subject to ADP testing. No plan amendment necessary.
+ Modifications of any non-safe harbor mandatory matching contributions can be made, but require a plan amendment and appropriate notices
+ Any discretionary non-elective or matching contribution can be suspended
+ If permitted by the Plan, certain expenses relating to administration can be charged the Plan directly
+ Employers should seek to maximize use of forfeited employer contributions in accordance with the Plan document.
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@DHGLLPQuestion #4
Would you like someone from DHG to follow up with you regarding your 401k
audit?
+ Within one week
+ By May 15th
+ By end of the 2nd quarter
+ We have it covered and don’t need help at this time
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@DHGLLPSummary
• Determine if an audit is required
• Engage a qualified auditor
• Understand timeline and gather information
• Address any audit findings
• Complete the audit
• File the Form 5500
• Additional relief for 401(k) Plans
