What Employers Need to Know About 401(k) Audits: A Conversation with Jake Kriegler

Introduction

Welcome to Traction with the Tiger. I am your host and Tax Tiger, Chris Wittich. I focus on moving myself, my clients, my firm, and the profession forward.

Today we have a special guest—a very special guest—Jake Kriegler. He is an audit partner here. He started about when I did, like 20 years ago.

End of 2005.

Yep.

Welcome to the podcast. He is an audit partner and leads our 401(k) audit practice. Our topic today is 401(k) audits. He’s the man who knows the most about it, and I know not very much about them.

What Is a 401(k) Audit?

Why Employers Need a 401(k) Audit

Can you tell me what a 401(k) audit is? Why does it matter? Why do people need to get them done?

A 401(k) audit, in general, is essentially required when you pass 100 participants within your plan. It’s a requirement by the Department of Labor, and it gets filed with your Form 5500 that gets submitted to the IRS.

Once you pass that threshold, they want independent accountants looking at the activities and making sure the participants are protected, the companies are following those plan provisions, and they’re in compliance.

They’re keeping an eye on the money in the right way. Because there’s a lot of money in these plans. And it’s not the company’s plan—it’s the employees’ money.

It’s the employees’ money, and that’s a key topic for the Department of Labor.

The little nuance with these audits is that our formal financial statement opinion isn’t necessarily about the biggest dollar amounts we’re talking about. Materiality matters in a way that’s different than it does in a financial statement audit.

These are more compliance audits.

We tend to base our materiality on what matters to the participants as opposed to the plan as a whole or the company as a whole.

In the Department of Labor’s eyes, every dollar matters because it’s the participants’ money, not the employer’s money.

Every dollar matters to me.

It does. We’re accountants, right?

That’s fair.

Understanding the 100-Participant Threshold

Who Counts Toward the Audit Requirement?

It’s 100 participants. Is that like 100 active employees? Or what if there are people who are still in the plan but left the company before? How does this hundred number work? Because that’s the magic number.

That’s the magic number.

There are certain rules around that that I can explain.

A few years ago, it used to be 100 eligible employees, which meant you didn’t even have to be participating in the plan. If you were eligible, it counted toward that audit threshold.

They changed that three or four years ago. Now it’s participants with account balances.

That can be active participants, or it can be terminated participants that still have a balance.

It did lower the number of audits required because simply being eligible didn’t count toward that threshold anymore.

Going forward, it seems like a lot of 401(k) plans—and certainly the IRS and tax law—are encouraging people to auto enroll.

New employees, at least.

It seems like that’s where it’s headed, where all the eligible people are going to get automatically enrolled.

Unless they’re grandfathered in with the previous plan.

All the new plans are probably going to have that auto-enrollment feature.

Auto Enrollment and Administrative Challenges

Where Employers Commonly Run Into Problems

Which can be a good thing.

It is.

It’s an area where we see a lot of mistakes on some of these plans where the plan sponsor or administrator assumes things are happening correctly, but they don’t.

Then we come in six months after year-end to do the audit, and the whole year they’ve had missing auto enrollment.

It can add up fairly quickly on what those penalties or corrections might be, especially if there’s an employer match involved too.

That’s interesting.

It seems like there are just a lot of parties involved.

You’ve got the third-party administrators, the custodians, payroll, and you’ve got to get it going correctly in the payroll system, which might be another provider.

A lot of cooks in the kitchen.

Some of these providers play well together and others don’t.

Why Payroll Integration Matters

Reducing Errors Through Better Systems

Obviously, the best setup is to have what they call a 360 integration, where the payroll is talking to the custodian or recordkeeper and all the changes flow through automatically.

The plan sponsors are still getting reports and notices when things are changing so they can monitor that and make sure it’s happening correctly.

But it flows pretty smoothly.

Honestly, as an auditor, we like to see that because we can rely on some of the controls at these service providers to either cut down testing or just get that warm, fuzzy feeling.

Absolutely.

Filing Deadlines for 401(k) Audits

Understanding the Form 5500 Timeline

When are these things due?

You were saying they get filed with the Form 5500s?

I didn’t know that.

I don’t do Form 5500s, I guess, for that very reason.

For a December 31 year-end, which is what most of the plans we audit have, July 31 is the initial filing deadline.

With an extension, it extends out to October 15.

To be honest, most of these get extended.

Nobody extends, right?

Right.

So October 15 becomes the deadline for most plans.

A lot of the work happens during the summer and into the fall.

Common 401(k) Audit Findings

The Most Frequent Compliance Issues

What are the biggest mistakes people are making?

Is it the auto enrollment, or is it how they’re administering the plan once it’s up and running?

What’s the biggest stuff you see?

Well, as I mentioned, auto enrollment is a big one.

If that’s not happening correctly, things can add up pretty quickly, especially if there are a lot of new hires throughout the year.

Timely remittances are a big topic with the Department of Labor too.

If the employer is holding on to the money too long, like we said, it’s not their money.

They like to see that money segregated from the company accounts and given to the participants as soon as administratively possible.

Some other issues relate to the plan provisions and how compensation is defined.

A lot of those mistakes happen when the payroll system isn’t set up correctly and compensation isn’t marked as eligible or ineligible.

You’ll see it on bonuses.

Employers will say, “We’re just not going to withhold any 401(k) employee deductions on this bonus,” even though it’s eligible compensation and the employee didn’t elect not to have that withheld.

Those are probably the three biggest issues we find when we’re going through the audits.

Correcting Common 401(k) Plan Mistakes

What Happens When Errors Are Found?

What do you do when you find those? Say you find a company that didn’t know they were making a mistake, but they’ve not been withholding on bonuses. Is this the kind of thing where they just start doing it correctly going forward, or how do they make it right for the past year because they’ve been messing it up?

They have to go back, and it’s called the missed deferral opportunity on that compensation.

The IRS has a pretty good Fix-It Guide out there. You can Google the IRS Fix-It Guide related to retirement plans, and it gives a bunch of different scenarios on mistakes that have been made and the corrections for them.

Essentially, you’ll go back and see what should have been deferred.

The employee got the money through their paycheck.

The rules, depending on the situation, are anywhere from 50% of what that deferral should have been down to zero in some cases.

But then, on top of that, there’s the employer match that was missed. That 100% has to be corrected based on what should have been contributed on the employer side.

On top of that, there are some lost earnings that need to get calculated and submitted.

If the company has been holding onto the money too long, it’s still kind of a penalty. It’s essentially an interest calculation because they had the use of money that belonged to the participants.

That’s interesting.

Preparing for a Successful 401(k) Audit

How Employers Can Stay Ahead

What do we do differently?

How do we help people get ready for these things?

How do we consult with them all year round?

Really, open communication throughout the year is key.

If it’s a new audit and you’ve never been through one, it’s not the end of the world.

We’re a buffer between you and the IRS or the Department of Labor.

You want us catching what’s going on and identifying mistakes because we can help you correct them.

Typically, you’re not going to get penalized because we found the issue.

The Department of Labor generally wants to work with employers. They don’t want to penalize plans so harshly that it ultimately hurts the participants.

If the mistake wasn’t intentional, they’re usually very reasonable to work with.

Documentation throughout the year is key.

If we come in after year-end, we can look at what you did and say, “Yep, that looks good,” or “We didn’t quite get this right. Let’s make the proper corrections.”

If the Department of Labor or the IRS comes in and sees you’ve documented everything and can explain your process, it makes their job easier.

They’re generally a little easier on you as well.

How Boyum Barenscheer Helps Clients

Experience Matters

For us as a firm looking at these audits, we understand they’re compliance audits.

So how do we differentiate ourselves?

We perform nearly 90 audits each year.

That gives us exposure to a lot of different situations and a lot of best practices.

We share that knowledge with our clients.

Whether it’s introducing a 360 integration that can reduce mistakes, decrease administrative work, or simply provide peace of mind, we like bringing those ideas to our clients.

Many of those improvements save time, reduce administrative responsibilities, and help eliminate common errors before they happen.

Planning Ahead for Your First 401(k) Audit

Don’t Wait Until the Deadline

If I had a client—or somebody listening—who has 95 participants today and expects to hire enough employees to cross the threshold next year, is there anything they should be doing now instead of waiting until next summer and then calling because they suddenly need an audit?

Ultimately, if you’re going to need an audit, the first day of the plan year is really when that process starts.

The audit itself doesn’t happen until after year-end.

Typically, it’s after April 15, once tax season winds down, and then continues through October 15.

Knowing early helps.

It gives you time to vet auditors, get comfortable with them, review the request lists, and understand the documentation you’ll need.

A lot of the information comes from your service providers, and on most of our audits we’re communicating directly with those providers to reduce the number of requests we need to make to our clients.

Managing Participant Counts

Understanding Force-Out Rules

Even more so, if I know I’m growing and approaching that threshold, it’s a little counterintuitive for me to say this because we like doing 401(k) audits.

But if you have terminated participants with smaller account balances, one way to potentially delay the audit requirement is by using what’s called a force-out.

If the participant’s account balance is under $7,000 and the plan provisions allow it, you can force those participants out.

If the balance is under $1,000, you can issue them a check.

If it’s between $1,000 and $7,000, you can roll it into an IRA for them.

Interesting.

You’ve got to force out the dead weight.

Honestly, I tell individual clients this all the time.

It doesn’t make much sense to have four different 401(k) accounts sitting at former employers with small balances.

For your own sanity, consolidate them.

Roll them together.

Know where your retirement savings are.

Simplify your financial life.

Even if it’s a small amount, you don’t want to forget about it.

I’ll take your five grand if you’re just going to forget it.

Recent Changes Affecting 401(k) Plans

SECURE 2.0 and Other Retirement Plan Updates

Is there anything we haven’t talked about in the 401(k) world that I should know?

I know about ten minutes’ worth of 401(k) material now.

The laws are always changing.

We had SECURE 2.0 come out, and there are provisions related to that.

There are new options that allow employers to match student loan payments.

There have also been changes to catch-up contributions.

If you’re over age 50, you can make additional contributions to build your retirement account, and those catch-up contributions are moving toward Roth treatment instead of traditional pre-tax treatment.

There are definitely personal planning implications.

I always tell people that even coming out of college, I had friends who weren’t contributing anything.

I’d ask them, “Does your employer give you a match?”

They’d say yes.

I’d tell them, “At least contribute enough to get the free money.”

Then, if you want to save more, you can decide whether to do it personally or through the retirement plan.

Free is a good price.

It is.

Always take advantage of free.

Free, tax-deferred, and employer-funded—it’s a great opportunity.

Closing Thoughts

All right.

Well, thank you for joining us.

I hope you found this interesting and useful.

If you did, share it with a friend and subscribe for more Traction with the Tiger content.

Thanks, everybody.