Avoiding a Negative Retirement Plan Audit

Your employees seem happy with the 401K plan you offer. None of your peers’ companies have ever incurred fines for non-compliance (as far as you know). And if your plan ever was audited, it surely would stand out as a best practice for others, right?

Not necessarily.

Unless you know the ins and outs of the Employment Retirement Income Security Act (ERISA), and have studied corporate 401K plan case studies (including the penalties of non-compliance), you may want to get a second opinion. If only to make sure you keep a clean track record or find out what you didn’t know.

“The majority of businesses found negligent in 401K plan audits by the IRS and Department of Labor never intended to make errors,” says Nancy L. Cox, CPA, a principal in the commercial division of The Bonadio Group. “Many business leaders are simply unaware of their own fiduciary responsibility when sponsoring a plan. They may hire a fiduciary to help, but the business is still legally accountable for everything.”

The Bonadio Group is a nationally ranked, top-40 CPA firm with offices in New York State and Vermont. Cox and her associates spend much of their time counseling clients on retirement sponsor regulations. Her firm also helps businesses large and small navigate to clear waters when issues unexpectedly arise.

What is a “Large” 401K Plan?

According to IRS and DOL guidelines, businesses fall under retirement plan audit scrutiny when they become the sponsor of a “large” Plan. Large retirement plans are defined as plans with total eligible participants of 100 or more at the beginning of a Plan year. But here’s the detail many don’t know: a participant is defined as an active participant/employee, a retired or separated participant/employee, an eligible but not participating employee, or any employee’s beneficiary.
So the word “large” has far less to do with the small, medium or large size of a company’s workforce.

“Once you are a large plan, you are required to have a third-party CPA firm perform an audit of the plan’s financial statements to be attached to form 5500 every year,” adds Cox. “It shows that you have had the Plan audited by a qualified independent public accountant. There are hefty penalties for filing late—over $2,000 per each day tardy.”

Exceptions to the Requirement

Cox says that there are only two occasions when a Plan sponsor does not need to file annually.

● Short Plan Years—If the Plan qualifies as a large Plan and its Plan year is seven months or less, the sponsor may defer the audit requirement to the following Plan year.

● The 80 to 120 Participant Rule—If the number of participants reported is between 80 and 120 and a Form 5500 was filed in the prior year, the sponsor may elect to complete the current year's Form 5500 in the same category (large or small Plan) as filed in the prior year. Having an accurate count of your participants, again, is crucial.

Preventing Audit Problems

The Bonadio Group performs employee benefit plan audits for many clients. But they offer something that is even more helpful—corporate retirement plan reviews, or what might best be described as pre-audit audits.

“By spending time assessing a business’s retirement plan, its management of the plan, procedures and stewardship, we help businesses know that they are upholding their fiduciary responsibilities before it’s too late,” she explains. “It’s a prevention-first approach and helps organizations avoid potentially negative findings, and the expenses in time and/or money that corrections require.”

Common Errors in 401K Management

Cox adds that the following errors are among the more frequent mistakes businesses make when sponsoring retirement plans:

● No formal procedures, reviews or chain of command in administering the Plan.

● Incorrectly applying eligibility criteria for vesting and contributions.

● Incorrectly applying plan provisions, including the definition of compensation used to determine contributions.

● Late employee deferrals.

● Late notification (or no notification) to employees informing them of eligibility.

● Few if any controls on employee contribution cycles.

● Tax withholding errors when employees take distributions. ● Violating break-in-service rules.

● Mistakes in calculating employee contributions.

“So much is done online these days or automated that it has taken away the routine touchpoints, checks and balances that keep managers up on Plan details,” she offers. “You absolutely need to know what’s going on regularly. The risks of not doing so are too great for the company, its employees and their additional beneficiaries.”

For additional information about 401K Plan audits and reviews, contact us at 716-256-1682 or by email. GCW Capital Group works closely with The Bonadio Group and others for your total planning and risk management success.