Your auditor’s engagement letter details the expectations of the roles of both auditor and plan sponsor. Understand that if the scope of services changes, the engagement letter may need to be updated during the course of the audit. Because an update typically means more work for the accountant, that can translate to paying higher fees. So, it’s better to fully vet the issues before beginning by asking these questions:

1. Can we perform a limited-scope audit, or do we need a full-scope audit to satisfy the DOL?
2. Do we have all of the financial records up to date and easy to locate?
3. Do we need to file a Form 11-K with the Securities and Exchange Commission (SEC)?
4. Do we have a list of internal controls by which the auditor can assess the risks of material misstatement of the financial statements?
5. What is the auditor’s responsibility regarding supplemental schedules required by the DOL?
6. Is tax-exempt status an issue? If yes, will the auditor give an opinion regarding the plan’s qualification in that regard?
7. Will the auditor be responsible for information for the Form 5500 and/or Annual Report?
8. How will the auditor communicate ERISA compliance issues found during the audit – verbally or in writing?
9. What is the auditor’s responsibility regarding electronic filings?
10. Have we agreed upon estimated delivery time, fees and billing arrangements?

Asking these questions will set expectations and fulfill your fiduciary responsibility to your plan participants. We recommend keeping a written record of all correspondence and requesting verbal communications to be confirmed in writing.

Here is a final group questions from the IRS to get your company ready for an EBP audit: 

1)      Are elective deferrals limited to the amounts under IRC 402(g) for the calendar year?

Be sure that the amount of elective deferrals does not exceed the 2010 limit of $16,500 for traditional or safe harbor 401(k) plans. For SIMPLE 401(k) plans, the amount is $10,500. An exception to the limit is catch-up contributions for participants who are age 50 or over at the end of the calendar year. For 2010, traditional or safe harbor 401(k)’s can catch up with an additional $5,500; SIMPLE 401(k) plan participants can add $2,500. 

2)      Have you timely deposited employee elective deferrals?

Not making timely deposits of your employee elective deferrals puts your company in the ‘prohibited transaction’ category, which results in an excise tax. Be sure that you have a policy in place with your payroll provider to determine the earliest date possible for separating the deferral deposits from general assets. Set up a procedure to make deposits and document accordingly. 

3)      Do participant loans conform to the requirements of the plan document and IRC 72(p)?

Your plan document needs to include a list of rules for participants to follow when taking a loan from a 401(k) account. Briefly, IRS code 72(p) says that:

-          The loan must be in writing and legally enforceable.

-          The loan amount cannot be more than $50,000 or 50% of the vested balance, whichever is less.

-          The loan must be on a repayment schedule at least quarterly, and be repaid within five years.

-          There are exceptions for leaves of absence, but the loan must still be repaid within five years.

 4)      Were hardship distributions made properly?

Employers can make the determination about hardship distributions, and definitions of hardship need to be included in the plan document. Examples of hardship are unexpected large medical bills, significant education tuitions, saving a home from foreclosure or funeral expenses for a close family member. You need to review the hardship distributions at the end of each year to make sure that the distribution is in alignment with provisions in your plan document.

For more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

It’s time to start thinking ‘audit’ for your 401(k) plan. Asking yourself a list of questions will help you prepare and can even save you money in audit fees. Answering these questions provided by the IRS and taking action can reduce the amount of time it takes for an auditor to complete a review. Here you go –

1)      Has your plan document been updated within the past few years?

At the minimum, you need to keep your plan updated to reflect current law changes. In addition, the following documents need to be kept with the plan: 

• Original plan document which provides in-depth details of how the plan must operate.
• All subsequent amendments or restatements to the plan document.
• All adoption agreements provided by a vendor that allows you to choose plan design options. While not the complete plan document, the adoption agreement includes eligibility requirements, the types and amounts of contributions allowed, the allocation method for employer contributions, the vesting schedule applicable to employer contributions and the distribution options.
• Any opinion letter or advisory letter issued by the IRS.
• Any determination letter issued by the IRS.
• Board of director’s resolutions and minutes, or similar records related to the plan.

 2)      Are the plan’s operations based on the terms of the plan document?

It seems like the operations would naturally be based on the terms. However, it’s easy to drift from the terms of the plan document. One of the most significant areas of drift is the definition of compensation. Make sure that all actions taken by the plan are and have been communicated to employees.

3)      Is the plan’s definition of compensation for all deferrals and allocations used correctly?

A plan’s definition of compensation must satisfy the rules for determining the amount of contributions. This can get tricky when considering deferrals and different types of allocations, such as bonuses. For 2010, the amount of compensation taken into account under the plan cannot exceed $245,000.

If you need more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

Every year you should review your requirements for operating your 401(k) retirement plans. The IRS has an online checklist to help you keep your plan in compliance with many of the important rules.

You can find it here:  http://bit.ly/bIU7ed