Retirement Plan Audits – First Time?

What to Expect and How to Prepare

As the summer months quickly pass us by, we rarely look forward to the fall. Unless you’re a college football fan, but I digress (GO BLUE). It’s time to brush off the sand, prepare for back to school, oh and don’t forget to file your Form 5500!

Employers that sponsor a qualified 401(k) or profit-sharing plan are required to file an annual Form 5500 with the Department of Labor (DOL) and IRS. The initial deadline for a calendar year retirement plan is July 31, but this can be extended 2½ months to October 15 by filing Form 5558. If an employer is considered a “large plan,” the plan will require an audit and the Form 5500 must include audited financial statements. Cue the oohhs and aahhs.

What is a Retirement Plan Audit?

What is a retirement plan audit, you may ask? A retirement plan audit is performed by an independent qualified public accounting firm, that we shall call “auditors” going forward. The auditors will review your retirement plan from top to bottom for the plan year in which you are filing the Form 5500. This will include, but not limited to, reviewing the transactions processed, type of assets in the Plan, as well as the overall operations and processes that make the retirement plan run. The duration and scope of the audit will be determined based upon these items.

Who Needs to Have a Retirement Plan Audit, What Are The Conditions?

As previously mentioned, a retirement plan audit is only required for a “large plan” covered by the Employee Retirement Income Security Act (ERISA). A retirement plan with 100 or more participants at the beginning of the plan year is considered a large retirement plan. The IRS definition of a participant is “an eligible employee who is covered by a retirement plan” (irs.gov). This would include those that are eligible to participate but choose not to. As participant counts can fluctuate from year to year, the DOL allows sponsors that filed as a small plan (under 100 participants) in the prior year to continue filing as a small plan as long as they have under 121 participants, which means, NO AUDIT! On the flipside, a large plan that drops below 100 participants must continue to file as a large plan until the participant count drops below 80. This is referred to as the 80-120 Rule.

The DOL recently released a Federal Register Notice announcing changes to the methodology in participant counts for the Form 5500. This new methodology allows plan sponsors to count only those eligible employees that have a balance in the plan starting for plan years beginning on and after January 1, 2023. This could allow many sponsors to forgo an audit, saving thousands of dollars!

What Are The Steps of a Retirement Plan Audit?

If an employer is required to have an audit, there will be various steps in the process they will go through. There are primary steps in the process: engagement, planning, fieldwork, and wrap-up/finalizing. Each step will involve the auditor and plan sponsor and often includes a service provider such as a Trustee, recordkeeper, and/or third-party administrator (TPA). The engagement and planning phase will be between the plan sponsor and the auditors. To start the engagement, the plan sponsor will sign the engagement letter detailing the scope of the audit. Once the auditor has been engaged, the planning phase will begin. The auditor will typically provide a questionnaire along with documentation requests for them to prepare for the audit. The plan sponsor will answer these questions and provide the documentation requested. Many of the questions and document requests can be obtained from the trustee/recordkeeper or TPA of the plan.

Once the initial data is provided to the auditor, the auditor will review and determine the necessary testing to perform. This testing can vary depending on the scope of the audit, but generally will include transaction level testing (contribution and distribution calculation) as well as operational testing (eligibility/contribution rate/investment allocation support). After determining the testing needed, the auditor will provide the plan sponsor with sample selections for each test they plan to conduct and include documentation requests to support their testing and plan for fieldwork. This is when the fun begins.

Fieldwork is the primary step in the process, when the auditor performs walk-throughs of the various processes for the retirement plan, gathers all the data for their testing, and performs inquiries with those involved in the operations. Prior to COVID-19, auditors would usually go on-site of the plan sponsors main office to complete fieldwork. Now that working from home or remotely has become the norm, more auditors are performing fieldwork either from their own office or their homes (thank you, technology). It’s also beneficial that much of the requested information is now available electronically.

The requests from the auditors may come as a shock to a plan sponsor that has never had an audit, as the list may be long. However, the plan sponsor should not hesitate to lean on their service providers. Service providers are more than happy to assist the plan sponsors with the request as some of the data is retained with them or available electronically through their recordkeeping systems. During fieldwork, the auditor will also request or prepare a draft of the financial statements. These should be reviewed carefully by the plan sponsor to ensure all disclosures and financial reporting are accurate with their records. Again, plan sponsors can reach out to their service providers to ensure these items are in line with the reporting of the trust.

Upon completion of fieldwork, the auditors will submit their work to the audit partner on the engagement for review. The audit partner will be the person who ultimately approves the procedures performed as well as sign off on the financial statement opinion on behalf of the audit firm. The timeline for wrap up can vary depending on the skill level of the auditors and overall workload they may have at the time. During the review, the partner may have additional questions or comments that require the auditors and plan sponsors to provide more information. However, their goal is to have the financial statements to the plan sponsor to file the Form 5500 on time. Once final approval is granted, the financial statements as well as a couple additional documents will be sent to the plan sponsor for review. These documents outline the scope of the audit, procedures performed, and ultimately request the plan sponsor to provide assurance that all information provided to the auditors was complete and accurate (Management Representation Letter). The letters and documents are signed by the plan sponsor and provided back to the auditors.

Wrap Up is Done, Now to File The Form 5500

The light can be seen at the end of the tunnel now as the audit is wrapped up and the signed financial statements have been released. There’s only one more step to complete and that’s to file the Form 5500. The auditor will also provide a copy of the final financial statements to the 5500 preparers (sometimes they will advise the plan sponsor to provide them). The 5500 preparers will then attach the financial statements and work with the plan sponsor to electronically file the Form 5500.

The process of going through a retirement plan audit can be long and drawn out, but there’s no reason to fear them. The auditors are not there to disrupt the plan sponsor or cause harm. They are there to ensure that the operations of the plan are in line with DOL and IRS standards, ensure accurate financial reporting, and because it’s a requirement. Plan sponsors can benefit from an audit to determine if there are any issues or gaps in their operations as well as determine if any corrections with the DOL and IRS are necessary.

The Retirement Plan Division at Greenleaf Trust works very closely with our clients during the audit exam period. We strive to ensure accurate reporting and make the process a less overwhelming experience.