If you are a business owner who sponsors a 401(k) plan for your employees, you may have a requirement to provide audited financial statements of the 401(k) plan along with the annual Form 5500. In general, government regulations require a 401(k) plan to have an annual financial statement audit if there are more than 100 eligible participants. While this may sound like a burdensome requirement, with the right service providers, the audit can be both effective and efficient. To help you navigate this audit, we have prepared the below synopsis of a typical 401(k) audit engagement:
- Typically, during this time of year the 401(k) plan’s custodian / third party administrator prepares an “audit package.” This package usually includes most of the schedules needed for the audit including Form 5500, supporting financial schedules and discrimination testing results. Once this information is available, we recommend that you forward this package to your auditor as soon as possible. Without an extension, the Form 5500 and audited financial statements are due on July 31st. It is important to note that this due date can be extended through October 15th.
- After the audit package has been provided to your auditor, there will most likely be a 2-3 week period in which your auditor reviews all of the schedules provided and selects individual transactions and participants for testing. Your auditor will then provide a schedule of requested information and also coordinate fieldwork.
- During fieldwork, the auditor will review the company’s employee files (e.g. enrollment forms, loan forms) and payroll reports. Normally, fieldwork lasts 2-3 days.
- Upon the completion of fieldwork, the auditor will work with you to wrap up any open items and will begin preparing the audited financial statements. The auditor will then provide you the draft financial statements along with a schedule of any proposed adjustments. At this time, the auditor will also provide a draft management letter which will include a discussion of the internal controls surrounding your 401(k) plan and any deficiencies noted as part of the audit.
- Upon your approval, the financial statements will be issued and you will need to include a PDF copy of the audited financial statements with Form 5500. At this point, you have completed the audit and have successfully submitted Form 5500.
The above description is a high level perspective of a typical 401(k) audit. The key to success is working closely with your auditor and to clearly discuss the expectations at the beginning of the engagement. Our firm specializes in 401(k) audits and we are always available to discuss any questions you may have regarding your 401(k) plan. Please feel free to contact our audit partner, Chris Passmore, anytime at (818) 789-1179.