Top 5 Questions About 401(k) Audits

    By Brian Price, CPA

    As the plan sponsor, it is your fiduciary responsibility to maintain the integrity of your employee benefit plan. That is why it is critical for Human Resource teams to comply with your plan’s regulations and to ensure that an audit is conducted each year. Here are the top five questions we are asked about 401(k) audits.

    When is a 401(k) audit required?

    If your company offers an employee benefit plan and has 100 or more eligible employees, you are required by the IRS and the Department of Labor to have your plan audited each year. Employees do not have to be enrolled in the plan. They only need to meet the criteria for eligibility as of the first day of the plan year. Terminated employees with plan balances must also be included. 

    Who should audit the plan?

    You will need an independent auditor. Select a CPA firm that is licensed and has experience with large plan or limited scope 401(k) audits. Even if you have an existing relationship with a CPA, make sure they are familiar with the rules and regulations associated with filing Form 5500 as the slightest error could result in penalties. It is not unusual for plan sponsors to hire a CPA firm just to conduct the 401(k) audit.

    What does a 401(k) audit entail?

    There are two types of audits: traditional and remote. Traditional audits require an auditing team to meet with your Human Resources team on site for up to one week to gather critical details about the intricacies of your particular plan and to access plan documents. Traditional audits take around 80 hours to complete over weeks or possibly months.

    Remote 401(k) audits are conducted virtually, saving you thousands in travel and expenses. However, remote audits still require the same level of access to your team, record keeper, and plan documents. The major difference is the time it takes the CPA firm to complete the audit, cost, quality, and the amount of time required of your employees to support it. In either case, the audit must be attached to Form 5500 and filed by July 31 unless you file for an extension.

    What happens if I don’t complete the audit or miss the deadline?

    Compliance is required by federal law to ensure that the funds entrusted to you by your employees are being handled responsibly. Failure to comply will result in hefty penalties that can amount to thousands of dollars per day if you cannot make the July 31 deadline. Filing an extension which will give you until October 15.

    How much does a 401(k) audit cost?

    Most audits take upwards of 80 hours plus employee time, so choose a firm that offers flat-rate pricing instead of charging an hourly fee. Flat rate audits typically cost $15,000 or more. This is because the work is time-intensive, requiring auditors to manually pour through your documents to reconcile data and perform complex calculations. However, it doesn’t have to cost that much.

    As you assess costs, ask the CPA firm about their 401(k) audit process. Modern CPA firms like PriceKubeca conduct error-free audits remotely for $7,000. We built Autire, auditing technology that allows us to gather data faster and more efficiently from your record keeper. Instead of 80 hours, PriceKubeca audits take approximately 30-35 hours and can be completed in three weeks requiring no more than 4 hours of your employee’s time to support the audit.

    New to the 401(k) audit process? Learn more about the 401(k) requirements and what it takes to get started.