Navigating the Challenges of 401(k) Audit Requirements and Fiduciary Responsibilities By Lisa N. Interian, CPA

Posted on September 12, 2014

According to the U.S. Bureau of Labor Statistics, retirement benefit plans were available to 85 percent of employees working for private businesses with 100 or more workers in 2013. In order to protect employees’ investments and help them to make sound financial decisions, businesses sponsoring these plans, particularly defined benefits and defined contribution plans, are required to report annually on their plans’ characteristics and financial operations.


The process for complying with the reporting and audit standards set forth by the Employee Retirement Income Security Act of 1974 (ERISA) can be a complicated and exhaustive undertaking, for which many businesses often are not adequately prepared. Following are common questions and challenges posed by administrators of employee-sponsored 401(k) plans regarding their audit requirements and fiduciary responsibilities.


Do We Have to Hire an Independent Auditor?

All employer-sponsored qualified 401(k) plans must file Form 5500, Annual Return/Report of Employee Benefit Plan, on an annual basis. However, once the plan has 100 or more eligible participants on the first day of the plan year, it is considered a “large plan,” which requires completion of Schedule H, Financial Information, of Form 5500 as well as a certification of the plan’s financial statements by an independent auditor (“audit requirement”.) This 100-participant threshold includes all eligible employees, including active employees contributing through payroll deductions; eligible employees that decline to participate in the plan; retired or terminated employees with assets in the plan; and deceased employees whose beneficiaries are entitled to benefits from assets in the plan.


There is an opportunity for businesses to avoid independent audits in subsequent years, after the plan first triggers the audit requirement, if their eligible participant count fluctuates below and then around the 100-participant threshold. Under the 80-120 Participant Rule, plan sponsors with 80 to 120 (inclusive) eligible participants at the beginning of the plan year have the option to choose the same filing status they completed in the prior year, either as a “small” or “large” plan, which may be different than their filing under the general 100-participant threshold. Plan sponsors should monitor their eligible participant count and provide their annual payroll census data to their Form 5500 preparers as early as possible, in order to determine their annual filing needs. Plan sponsors should also monitor the count of terminated participant balances, as there are options available to remove smaller balances from plan assets and therefore reduce eligible participant counts.


How Do We Prepare for an Independent Audit?

An independent audit of a plan’s financial statements will include a determination of the accuracy of financial information and disclosures, as well as the plan’s compliance with relevant labor and tax laws. Auditors will examine the operational aspects of the plan, such as plan policies, definitions of compensation, timing of plan contributions and the ways in which the plan fiduciaries follow the plan document and communicate with participants. The goal is to ensure that the plan operates as required – transparently – with appropriate oversight and in the best financial interests of plan participants. In preparing for the audit, auditors will look at payroll records, personnel records and plan-related correspondences. In addition, auditors will work closely with plan trustees and third-party service providers in conducting the plan audit.

What are Our Responsibilities as 401(k) Plan Administrators?

Administrators are responsible for managing plans in the sole best interest of participants. This includes carrying out the policies of the 401(k) plan in accordance with the plan documents and related laws and regulations; ensuring the diversification of plan investments to minimize risks of large losses; monitoring investment performance and replacing underperforming investments, ensuring the reasonableness of plan fees and defraying any unnecessary costs; and providing pertinent information to help participants make sound financial decisions.


One of the most common and costly errors plan administrators make is failing to understand their responsibilities as fiduciaries. In fact, many plan administrators often are surprised to learn that they are indeed plan fiduciaries and may be held personally liable for any breach of those responsibilities. Lack of expertise does not excuse the plan fiduciary in the case of a breach. Rather, the plan fiduciary is expected to seek the advice of professionals, as needed, to fulfill their fiduciary responsibilities. Whether a fiduciary breach is willful or accidental, the plan administrator may be responsible for paying back lost earnings that resulted from their actions or inaction.



What is Considered Adequate for Timely Deposits of Contributions?

ERISA regulations require employers to deposit participants’ contributions, “as soon as it is reasonably possible,” but no later than the 15th business day of the following month. Plan sponsors should consider their companies’ procedures and consistent history when determining what constitutes “as soon as possible” for their specific plans. Plan administrators may fall victim to their own efficiencies if they extend deposits beyond the timeframe that they historically have been able to make the deposit. A deposit made even one day past the usual timeframe can be considered late and lead to administrative headaches, such as the imposition of taxes on late contributions and repayment of lost plan earnings to restore participants and beneficiaries “to the condition they would have been in had the breech not occurred.” While there may be valid, supportable reasons for administrators to submit contributions later than usual, the Department of Labor will not accept excuses such as delays caused by employee vacations or employee turnover. To avoid late contributions, plan administrators should establish clear and consistent procedures.


Employer-sponsored retirement plans provide a wealth of benefits to businesses and their employees. However, failing to understand the annual requirements and a plan sponsor organization’s fiduciary responsibilities over such plans can be quite costly – both for the employer and the administrator(s) of the plan. Experienced auditors are a great resource to educate businesses and work with them to comply with ever-changing regulations.

The advisors and accountants with Berkowitz Pollack Brant have extensive experience helping businesses establish defined benefits and defined contribution plans and working with plan administrators to comply with strict audit and reporting requirements.


About the Author: Lisa N. Interian, CPA, is a senior manager in Berkowitz Pollack Brant’s Audit and Attest Services practice. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at