A 401(k) audit is an essential part of maintaining compliance and ensuring the integrity of your company’s retirement plan. However, even businesses with the best intentions can stumble. Without proper preparation and oversight from a Houston 401k auditor, errors can creep in, leading to delays, penalties, and potential violations of regulatory standards.
To help you stay on track, we’ll focus on the most common pitfalls in 401(k) audits and offer practical advice on how to prevent them.
1. Delayed Contributions
One of the most frequent issues flagged during 401(k) audits is the untimely remittance of employee contributions. Department of Labor (DOL) regulations require employers to deposit contributions as soon as they can be reasonably segregated from the company’s assets, which can sometimes mean just a few days. Delayed contributions not only violate compliance standards but also risk employee dissatisfaction.
How to Avoid It:
- Establish a clear and consistent timeline for depositing contributions and integrate this process into your payroll cycles.
- Automate contribution transfers wherever possible to minimize human error and avoid delays.
- Regularly review deposit records to ensure timely compliance and address any gaps immediately.
2. Operational Errors
Operational errors occur when the plan is not administered as outlined in its governing documents. Examples include incorrectly applying eligibility rules, miscalculating employer match contributions, or executing distributions in violation of plan terms. These errors are common, particularly if there’s a lack of knowledge or training on the plan’s provisions.
How to Avoid It:
- Conduct an annual internal review to compare operational practices against plan documents and correct discrepancies early.
- Provide training for all staff and third-party administrators involved in managing the plan, ensuring they understand the specific provisions of your 401(k) plan.
- Maintain updated plan documents and share revisions with all relevant personnel to ensure consistent adherence.
3. Noncompliance with IRS Contribution Limits
The IRS sets annual limits for contributions to 401(k) plans, including employee deferrals and total contributions, which can change from year to year. Exceeding these limits introduces compliance risks and can result in financial penalties for the employer and potential tax issues for employees.
How to Avoid It:
- Partner with a reliable recordkeeper or third-party administrator to track deferral amounts and total contributions against the annual IRS limits.
- Communicate clear contribution guidelines to employees and monitor high-salaried participants at risk of exceeding limits.
- Perform nondiscrimination testing annually to ensure contributions are fairly distributed among employees.
4. Insufficient Documentation
Auditors rely on accurate and complete records to evaluate compliance and financial integrity. Missing or disorganized documentation often leads to delays during the audit process—or worse, findings of noncompliance. Key records include payroll data, participant disclosures, and Form 5500 filings.
How to Avoid It:
- Create a robust document retention policy to keep track of important 401(k) plan records for the required time periods.
- Use a secure document management system that allows for easy organization and quick retrieval of plan records.
- Conduct periodic document audits internally to ensure all files are accurate, complete, and up-to-date.
5. Neglected Plan Communications
Employers have a fiduciary duty to communicate key plan updates, disclosures, and changes to participants. Failure to provide timely and accurate information can raise concerns about plan transparency and leave the plan sponsor exposed to fiduciary risk.
How to Avoid It:
- Develop a schedule for participant communications, including notices about contributions, investment options, and annual updates.
- Work closely with your plan administrator to ensure all participant notices meet DOL and IRS requirements.
- Maintain records of all communications to demonstrate your commitment to compliance if audited.
6. Poor Coordination with Auditors
A poor working relationship with your auditors can lead to misunderstandings, delays, and an overall inefficient audit process. Often, this results from a lack of preparation or miscommunication about audit requirements.
How to Avoid It:
- Designate a single point of contact within your organization to coordinate directly with auditors.
- Provide auditors with requested documents promptly and be readily available to clarify any queries they may have.
- Communicate openly about any known plan issues, transparency can help mitigate the auditor’s concerns and streamline resolution.
Conclusion
401(k) audits can be complex, but with careful preparation and proactive management, employers can avoid common pitfalls and ensure a smooth process. By addressing issues like timely contributions, operational accuracy, and proper documentation head-on, you can safeguard your plan from compliance risks while fostering trust with your employees. A well-prepared 401(k) plan not only supports your workforce’s future but also strengthens your business’s reputation and operational efficiency.
