A 401(k) plan audit can uncover more than numbers. It can reveal gaps in plan administration, payroll processes, employee data, and internal controls. Many 401(k) audit findings are not the result of intentional wrongdoing. They often happen because plan provisions are complex, responsibilities are split across multiple parties, or manual processes are used without regular review.
Employers can reduce audit issues by taking a proactive approach throughout the year instead of waiting until audit fieldwork begins. Below are several common mistakes employers should watch for.
One of the most common 401(k) audit issues is the late deposit of employee deferrals and loan repayments. Employee contributions should be remitted to the plan as soon as they can reasonably be separated from the employer’s general assets.
Auditors will typically review payroll dates, pay periods, and deposit dates to determine whether contributions were remitted consistently and timely. If one payroll is deposited later than the employer’s normal pattern, that delay may be questioned. Late remittances may require correction, including lost earnings calculations and additional reporting.
Employers should review their remittance process regularly, especially when payroll providers change, staffing changes occur, or if there are one-off payroll cycles. Employers should also ensure the process is followed consistently and that backup personnel are available if the employee responsible for remittances is out of the office.
Census data is the foundation for many plan calculations. Inaccurate employee information can lead to errors in eligibility, vesting, contributions, and nondiscrimination testing.
Common census data issues include incorrect hire dates, termination dates, birth dates, hours worked, rehire dates, compensation amounts, and employee classifications. Missing or inaccurate demographic information can create problems during testing or when determining whether employees are eligible to enter the plan.
Employers should compare census data against payroll and HR records before providing it to the recordkeeper, third-party administrator, or auditor. This review can help catch inconsistencies before they affect plan operations.
The plan documents define what compensation should be used for employee contributions, employer contributions, and testing. Payroll systems do not always mirror these definitions.
Errors can occur when bonuses, commissions, overtime, fringe benefits, severance, or other special pay types are handled incorrectly. For example, an employer may historically exclude bonuses from compensation eligible for employee deferrals even though the plan document does not specifically exclude that compensation type. In that situation, although the employer is handling bonuses the same way for all eligible employees, the plan documents may need to be amended or restated to properly exclude bonuses from eligible compensation.
Employers should periodically review payroll codes to ensure they align with the plan’s definition of compensation. This is especially important when new earnings codes are added or when payroll responsibilities transition to a new employee.
Auto-enrollment and auto-escalation features can help employees save for retirement, but they also create additional administrative requirements.
Common issues include failing to enroll newly eligible employees timely (or at all), applying the wrong default deferral percentage, missing annual escalation increases, or not properly processing opt-out elections.
For plans with auto-enrollment, employers should maintain documentation for each employee on when they were eligible, when they were notified, whether they opted out, and if not, whether the correct deferral rate was applied. Employers also should review employees during each auto-enrollment period to ensure they were enrolled during the correct pay period and at the correct deferral percentage.
Many employers use spreadsheets for calculations such as employer match true-ups and eligibility tracking. While spreadsheets can be helpful, they also increase the risk of formula errors, outdated data, broken links, and version control issues.
A spreadsheet used year after year may contain hidden errors that go unnoticed until the audit. Employers should build in review procedures, restrict editing access when appropriate, and retain support for formulas, assumptions, and source data.
Vesting errors often occur when years of service are not tracked accurately or when plan-specific vesting rules are misunderstood. Common mistakes include incorrectly calculating years of service due to breaks in service or rehires. In many cases, inaccurate or incomplete demographic data contributes to these issues.
Another frequent problem is applying the wrong definition of a “year of service.” Plan documents may define a year of service using different methods, such as elapsed time (crediting service on each anniversary date) or an hours-based approach (requiring 1,000 hours during a plan year).
When employers fail to follow the specific service definition outlined in the plan documents, participants may receive distributions using an incorrect vested percentage, resulting in overpayments or underpayments. Careful review of plan provisions and accurate tracking of employee service histories are essential to prevent vesting calculation errors.
401(k) plan administration involves coordination across multiple systems, vendors, and internal departments. Mistakes can happen, but many can be identified early with the right review process.
SVA works with employers to evaluate plan operations, review common risk areas, and identify process improvements before they become larger audit issues. Our professionals help clients navigate compliance requirements, strengthen documentation, and coordinate with payroll providers, recordkeepers, and third-party administrators.
By taking a proactive approach, employers can reduce surprises during the audit, support plan compliance, and provide employees with a well-managed retirement benefit.
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