All audits are not created equal, nor do they have to be. However, understanding whether you are required to prepare a full audit vs. a limited scope audit is important. Sponsors of 401(k) plans with more than 100 employees (with a few exceptions such as the 80/120 rule) are required to provide audited financial statements attached to the Plan’s annual informational tax return (IRS Form 5500). The 401k plan audit must be completed by an independent CPA firm and can be either: (1) a full scope audit or (2) a limited scope audit.
According to the blog 5500audit.com, over 80% of all 401(k) audits are limited-scope audits.
When planning your 401k plan audit other retirement plan, you might question if a full scope audit or limited scope 401(k) audit should be conducted. It is important to determine if your plan requires an audit, and know your options. Failure to comply with audit requirements can lead to a host of long-term complications for your business.
Is an 401k Plan Audit Required for My Company’s Plan?
Under the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), an employee benefit plan is required to make an “Annual Report.” This report is filed using a Form 5500 with various attached schedules of information. Although one report is filed, it goes both to the Internal Revenue Service (IRS) and the Department of Labor (DOL).
Each employee who is eligible to contribute to the plan is treated as an eligible participant, whether they contribute or not. Retirees and separated participants, along with the beneficiaries of deceased participants who are receiving benefits, or are entitled to receive benefits, are also treated as eligible participants.
The regulations surrounding 401(k) audits are strict and complex. Non-compliance can lead to expensive fines and litigation. It is advisable to retain a trusted, professional third-party to assist in conducting the independent audit.
Full vs. Limited Scope Audit – Which is right for our plan?
Limited Scope Audits
To qualify for a limited scope audit, an insurance carrier or bank must act as the trustee or custodian for the plan. This entity must be state or federally chartered and regulated, supervised and subject to examination. The trustee must also certify to the accuracy and completeness of any investment information.
A limited scope audit works well for some. They usually come along with lower fees and fewer areas subject to audit testing. It’s important to note that the accounting firm that is charged with performing a limited scope audit cannot give an unqualified opinion on the plan’s financial statements. An unqualified opinion is an independent auditor’s report that your financials are fair and accurately presented. Reports that accompany limited scope audits are referred to as a Disclaimer of Opinion.
Full Scope Audits
In a full scope audit, audit work is performed on the plan’s investments. Procedures include sending confirmations to the custodian, trustee or insurance company to verify ownership of investments, along with the valuation of investments, investment transactions and investment income.
The accounting firm performing the full scope audit, will provide an independent auditor’s opinion on the plan’s financial statements.
The independent auditors’ report, financial statements and required schedules are filed with the Department of Labor. This is due on the last day of the 7th calendar month after the end of the plan year, unless an extension is requested.
