If your company offers a 401(k) plan, you may find yourself facing an audit from not one but two agencies: The DOL focuses on fiduciary standards, breaches and penalties, and the IRS is concerned with whether the plan conforms to the Internal Revenue Code. But regardless of who is executing the audit, the central theme is compliance.
The end game
Most 401(k) audits are sparked by random selection, while others are triggered by participant complaints, certain information reported on the Form 5500, bankruptcy filings and media reports.
Also, audits can arise out of IRS questionnaires. In the past, the IRS sent plan sponsors questionnaires to help pinpoint areas of audit focus. The agency made it clear that failure to respond to the questionnaire “will result in further enforcement action,” such as an audit of the plan.
Though your plan may never be selected for an audit, the odds of an investigation will rise exponentially if there’s a perceived risk of noncompliance. In other words, an audit can be initiated if the DOL or the IRS identifies the plan as being potentially problematic.
In the end, 401(k) audits seek to satisfy one fundamental question: Is the plan compliant? To arrive at this answer, the DOL or the IRS will send you a letter informing you of its intent to audit the plan and the information that should be made available to the auditor.
The examination
DOL 401(k) audits mainly focus on issues surrounding the following:
- Participant discrimination.
- Plan fees and distributions.
- Timing of deposits.
- Plan documents.
- Employee notices.
- Hiring of service providers.
- Prohibited transactions.
- Investment processes.
IRS 401(k) audits primarily examine areas involving:
- Plan document maintenance.
- Eligibility tests.
- Discrimination testing.
- Deferral limits.
- Matching contributions.
- Hardship distributions.
- Participant loans.
- Form 5500 filing.
Is an auditor knocking on your door?
If you receive notification of a 401(k) audit:
- Don’t panic. Instead, concentrate on being prepared for the big day.
- Remember, the auditor is doing his or her job by requesting the information, and your job is to provide it.
- Begin collecting the required information promptly after receiving the notice.
- Contact your third-party administrator or payroll provider if you need help gathering the requested information.
- Organize the data in a way that makes it easy for the auditor to access, such as by labeling folders and documents.
Keep in mind that auditors are looking for specific information, and you need to deliver only what is requested. Also, if your 401(k) plan isn’t in the best shape, you won’t be doing yourself any favors by serving up unsolicited information. If the auditor has additional concerns during the audit, he or she will let you know.
If you haven’t done so already, now might be a good time to outsource your 401(k) responsibilities to a provider that can help you reduce your exposure to future audits.