Preparing for a 401(k) or Employee Benefit Plan (EBP) audit requires careful attention to detail and proactive organization. Whether your audit is required by the IRS or Department of Labor (DOL), or it’s simply best practice to ensure compliance, being fully prepared can make the process more efficient and less stressful. Our CPA team specializes in guiding plan sponsors through the audit process, helping you meet all regulatory requirements and avoid penalties.

Why an Audit is Necessary

An audit of your 401(k) or employee benefit plan is required by the DOL if your plan has 100 or more eligible participants. It serves to verify the accuracy of your financial statements, ensure that contributions are being managed properly, and confirm that the plan complies with ERISA (Employee Retirement Income Security Act) regulations. The IRS may also audit plans to ensure compliance with tax regulations. Failing an audit can lead to significant penalties and jeopardize the financial integrity of the plan.

Step-by-Step Guide to Preparing for a 401(k) and EBP Audit

Follow these key steps to ensure your plan is fully prepared for a 401(k) or employee benefit plan audit:

• Organize Plan Documents: Gather all key plan documents, including the plan’s adoption agreement, amendments, summary plan description (SPD), and any prior audit reports. Ensure that these documents are up to date and accessible.
• Review Financial Statements: Ensure that all financial statements, including contributions, distributions, and plan assets, are accurate and compliant with generally accepted accounting principles (GAAP). A CPA review can help identify any discrepancies before the audit.
• Confirm Participant Data: Make sure that participant data, including eligibility, contributions, and distributions, is accurate and up to date. This includes verifying participant employment status, compensation, and any loans or hardship withdrawals.
• Test Internal Controls: Review and test your plan’s internal controls to ensure that they adequately safeguard plan assets and prevent fraud. This includes reviewing payroll records, contribution tracking, and expense reimbursements.

Common Audit Issues and How to Avoid Them

Audits can uncover several common issues in 401(k) and employee benefit plans. Knowing these potential pitfalls can help you avoid them:

• Late Participant Contributions: One of the most common audit issues is failing to remit employee contributions to the plan on time. Ensure contributions are deposited as soon as possible, typically within 15 business days.
• Inaccurate Participant Data: Missing or incorrect participant data, such as incorrect compensation amounts or eligibility, can lead to audit findings. Regularly update and verify all participant information.
• Failure to Follow Plan Documents: Ensure that your plan operations follow the terms outlined in your plan documents. Deviating from plan terms can lead to compliance failures and audit issues.
• Insufficient Documentation: Maintain thorough documentation for all plan activities, including contributions, loans, distributions, and participant elections. Lack of proper documentation can result in audit deficiencies.

The Role of CPAs in Audit Preparation

Working with a CPA firm that specializes in 401(k) and EBP audits can significantly streamline the audit process and reduce the risk of non-compliance. Our CPA team provides the following services to help you prepare:

• Pre-Audit Review: We conduct a pre-audit review of your plan’s financial statements and operations to identify any potential issues before the formal audit process begins.
• Internal Control Testing: We test your internal controls to ensure they are effective in safeguarding plan assets and preventing fraud or errors.
• Compliance Review: We help you review your plan’s compliance with ERISA and IRS regulations, ensuring that all plan activities are properly documented and in accordance with legal requirements.
• Coordination with Auditors: We work directly with the audit firm to provide them with the necessary documentation, ensuring a smooth and efficient audit process.

What to Expect During the Audit

During the audit, the auditors will review plan documents, participant records, and financial statements to ensure compliance with ERISA and IRS requirements. They will also test internal controls and verify that contributions are being handled properly. Once the audit is complete, you’ll receive a detailed audit report that outlines any findings and recommendations for improvement.

Get Expert Help with 401(k) and EBP Audit Preparation

Preparing for a 401(k) or EBP audit doesn’t have to be overwhelming. Our CPA team is here to guide you every step of the way, ensuring that your plan is fully compliant with IRS and DOL regulations. From pre-audit reviews to internal control testing, we provide comprehensive support to help you navigate the audit process with confidence.

Contact us today to learn more about how we can assist with your 401(k) or employee benefit plan audit preparation.