Tips for Preparing for a Plan Audit

No one expects the Spanish Inquisition — or, rather, an IRS or Department of Labor (DOL) audit. And yet, it can’t hurt to be ready for one. Of course, the best way to be ready is to comply with the law and regulations and follow best practices. But there are practical steps one can take to be ready as well, just in case — and the Millennium Trust Company suggests some in its recent webinar, “Preparing for and Surviving a Plan Audit.”  

So what catches the IRS’ attention? Millennium Trust notes that the IRS analyzes Forms 5500 that plans file and looks for inconsistencies. Audit flags they may find in Forms 5500 include: 

• missing data;
• a sharp drop in the number of participants;
• a large number of participants who no longer work for the company who are not fully vested; 
• a high number of leased employees; 
• a high number of employees who are contractors;
• top-heavy 401(k) plans; 
• large outstanding loan balances; and 
• a high percentage of assets classified as “other.”

The IRS also pays attention to how the plans of acquired companies are handled during and after mergers and acquisitions. 

What about the DOL? Millennium advises not ignoring a letter from DOL that notifies a plan that an audit is impending and that specifies information the DOL will require. This likely will include documents that create and describe the plan, as well as information concerning plan reporting, administration, participants, assets and sponsors. 

A self-audit is one way to be ready in advance. Some ideas Millennium offers regarding self-audit include: 

• determine if the plan documents comply with the Internal Revenue Code and implementing regulations and guidance;
• determine if the plan document and summary plan description align; 
• be familiar with the all features and provisions if you have a prototype plan;
• identify and correct any inconsistencies between plan procedures, documents and forms and  plan administration; 
• review areas an auditor may review that could threaten the plan’s tax-favored status. 

A plan can also act pre-emptively before an audit is even on the horizon by establishing monitoring procedures to ensure compliance with the plan’s terms, communicating with service providers and conducting oversight of any functions that are outsourced.