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What to expect from a 401(k) Audit

Published by Summit Marketing Team on May 11, 2020 6:00:00 AM

The 401(k) Audit CPA Success Show: Episode 3

A 401k plan is a benefit you are offering to your employees, so it probably isn’t obvious how to prepare for an audit and what to expect from the process.

In this episode, Jamie Nau sits down with Kyle Tanaka to talk about the process you can expect the auditing firm to follow and how you can best work with your auditors through every stage.


Jamie Nau: Welcome to episode 3. Today we have a great topic. In our last episode we talked a little bit about our streamline process. Today we're going to talk about what it's like to go through an audit. Specifically a distributed audit since Summit is a distributed we are going to talk about what the possible differences are there. And to have this conversation I'm joined by Kim Moore, our Director of Auditing and Kyle Tanaka, Senior Auditor. So we're excited to talk about this. So Kim, let's just jump right in, and kind of explain the process for us.

Kim Moore: Thanks Jamie. Sure. The audits follow a pretty standard process throughout the entire process of completing an audit but they are a little bit different we're going to highlight some of the differences in doing an audit virtually and using a distributed audit team versus what some of our clients and potential clients may be used to where the audit team physically comes to their location and spend the day or two days or a week or multiple weeks depending on the situation at the actual client location. So when we start an audit an audit begins with some planning materials. We have to first have the engagement letter signed engaging us to begin the audit, that's a formal letter, it's kind of like a contract between the audit firm and the client or the plan in this case to conduct the audit. Once all that kind of paperwork is done we begin what's called the planning process, and we use the planning process just like you would imagine, planning to find out about the plan, to find out about the company that sponsored the plan, to find out about the payroll structure that's utilized by the company, to look historically at the plan. The financial information, there's a whole variety of information that we gather and we review to make sure that we have a real good understanding of all the components of the plan and how it works. At the beginning of the process we'll do a kickoff meeting with the client and we'll just gather some general information. We'll do basic introductions and we use a tool called GoTo Meeting to do that because we are not physically going to visit the client. Most firms might do that either via just a simple phone call, or they might physically go to the client's location to do the meeting, but we have clients all over the country. So we use something called GoTo Meeting and it's just what it says. It's a meeting software tool that allows us to have as many people as we would like on the call. It's done via video as well as audio. So you're talking to the people, you can see them if you choose to use that feature, and we'll just talk about the various components of the audit, the timing. Like I said, do some basic introductions, and we'll use that GoTo Meeting all throughout the audit as we need to discuss things and gather information from the client and as well as sharing information that we may have. From that conversation we will gather basic information that will allow us to put together our first document request. That's typically in audit speak called a PBC list, or sometimes a document requests list. There's various terms for it but we use a tool called Smart Sheet to gather that information. That is an electronic tool that we subscribe to and we will have one for each audit. And in that tool will be listed the items that we need to conduct the audit and it'll start from that very beginning planning type material. We'll continue using that sheet throughout the audit. It lists on each line one particular item, or particular grouping of items, that we need. It will provide information about that it'll say who needs to provide that to us and a due date, so we'll set that up, give access to that smart sheet to the folks that we're working with on the audit as well as the folks here at Summit that are going to be working on the audit. And it's an interactive tool so it's available 24/7 that people can get into it as often and whenever they want. So if they find maybe they've got some extra time on a Saturday or something they can get into the tool and load whatever information they want. They can make notes on it and the same for us. We have 24/7 access to it as well. So if you've got a few minutes to work on something, that's great. You can get in and use it. If you need to spend an hour to upload you can do that as well. It's really a very flexible tool. I don't know Kyle you just joined us this year, he's new to Summit and he has 401(k) audits before but more in the mode going to the client. So Smart Sheet she would have been a new tool for him. Kyle do you want to kind of explain your experience with Smart Sheet and what you found good and bad about it?

Kyle Tanaka: Yeah definitely. So Smart Sheet. It's a really robust web based tool that we can request like specific things, like a specific years plan document and then the client is able to securely upload the document so we can see it on the specific line that we requested it on. So you know it makes things really easy because it's already indexed and the client uploaded there. So yeah it's really as simple as just dragging it from the Smart Sheet to our web based audit software. So you know it really cuts down on time, and it's really handy because at my old firm we would physically go out to the client's office and then we would have to bring like a really junk scanner, and then you know all the letters are illegible and, you know, it just rips their paper up. So yeah it really saves us a lot of time and streamlines a lot of the requests that we need.

Jamie Nau: Is there any limitations to Smart Sheets in terms of like document types, or document size? Or is it pretty good to do all that?

Kim Moore: No. No not really. Another good reason for using the Smart Sheet tool is if you're sending things even via secure using a portal or securing the information trying to send an email there's all kinds of limitations on the size. And we do need a lot of documentation. That's one of the kind of hallmarks of an audit is that there's a lot of you know electronic paper that's going back and forth. So Smart Sheet eliminates that because it will allow any kind of electronic, obviously has to be electronic, but any kind of electronic document so PDF, Excel, Word, camera pictures any kind. I mean we've actually had that. Yeah. So you know it will take just about anything. Size isn’t a limitation. It's a very robust tool as Kyle mentioned. So you know, the lines just keep going, you can keep adding things, we can add numbers of people, so we're not limited in that we can only have two or three people on the sheet we can have multiple people if we need to. And Kyle brought up a real good point that it's secure. We deal with very confidential information in these audits, as you can imagine, payroll, data, birthdate, hire date ,emails, home addresses, even salary information, and in certain cases it can even be medical information, just a variety of things. So we want to make sure on both sides that that information is protected and then there's not a risk you know, if you were just sending it straight through the email. Obviously there's risk someone could intercept that, get a hold of that. This eliminates that and it's very access sensitive. So even all the folks here at Summit don't have access to it and even within the audit team only the individuals working on that particular audit have access it's very limited. We only grant access to others outside of the organization that the client is telling us need access. We would never grant it to just anybody. So the security aspect is very important to us. We take that very seriously here. And also as Kyle mentioned it's a very organized tool. So it eliminates us having to you know, sort through tons of data and trying to figure out, I wonder what they meant this to be for. And it also retains the documents. So as we are pulling the documents down and using them if we forget to pull something down or maybe we're looking at something saying, I don't think I'm going to need that, I'm not going to pull that and use it. Then as we're working through the audit we find out, oh yeah. Now I know why they meant to give me that. I really do need it. It's still sitting there. So until we either physically remove it or we delete Smart Sheet, it will stay there and we'll leave it there until the audit is completed, and then we'll go back and delete it. So it saves us having to go back to the client saying, I know you sent this to me but for whatever reason I don't have it and I need it. Can you send it again? It eliminates all of that which the clients find very helpful. It's also useful to them. We’ll keep them sometimes from one year to the next and the client will say, hey you know you've asked me for this particular payroll report. I can't remember what I gave you can you show me what I gave you last year? We can easily just give them access and they actually usually retain the access. They can go look and say, oh yeah it was report number fifty five out of the thousand I've got access to. I'm going to go generate report number fifty five for this year. So it's a really helpful tool we've we found the clients really like

Kyle Tanaka: It saves us a lot of time also because we can just send an example of exactly what we used last year.

Jamie Nau: Yeah I can think back to my audit days and I can't remember how many times I would be in an audit room, an audit room being more like coat closet. And you would have that one sheet like, I know you requested forty five things but I don't know if this one sheet is that. So to have that tied to an actual request that's super helpful. And then again for the follow up I'm sure that clients just love it. The amount of how organized we are.

Kyle Tanaka: Definitely.

Kim Moore: And it helps in in our conversations with them because the tool looks very much like an Excel sheet. If the viewers are familiar with Excel, which I think everybody is, you know as we're on a GoTo Meeting with the folks we can say, well look at line number three if there's confusion you can say, look at line number three and we're talking specifically you know on that line we need this particular item. Instead of you're just trying to generically talk about things. It helps make those conversations go easier and usually quicker. You don't have to fumble around trying to get everybody on the same page. So that really helps.

Jamie Nau: Yeah it makes a lot of sense. So how does the sheet adapt? Because if I remember correctly from my audit days, you would have the first request list go out, and that would be kind of the preliminary request list. Then you would take that and there'd be a lot of follow up request. So do you just add to the bottom? Does it create new sheets? How do those follow up requests work?

Kim Moore: Yeah we actually use template sheets so we already have templates set up depending on the type of audit. If it's a returning client or a brand new client depending on various activities that have gone on in that plan versus another one. So we'll pull the template when we first set up the sheets and they're already set up with different sections. So we'll start off with the first section which is that generic information you mentioned, and then it will have a middle section which is kind of the next set of information, and then the bottom section will be the very specific testing items unique to that particular audit that particular year. And then we can just continue adding. We can create new sections. We can create new lines. The client can add a line if they want to say that instead of following this particular format I'm going to give you this because I think you're going to need this. They can add information, they can add comments, they can add lines, so yeah it just keeps going. Another nice feature about Smart Sheet is that you can turn on notifications. It's an option. You don't have to use it but we found it very useful that we can turn notifications on, on both sides. So we can have a notification, the client can set it so they get a notification, and that would tell either party that someone's added something, and then it will send you an email saying there's been activity on this sheet The email can give you a little picture, not the whole smart sheet, but a picture of it saying here's some lines where either something's changed or something's been added. That way the client doesn't have to go out every day. And look they're going to know when something's added. We usually will be doing emails or phone calls with the client anyway, so they're going to you know, they're going to get a couple of different ways. But you can set it up so it would be completely automated if you wanted to do that, and that's nice because we don't always know when the client is adding information. So it saves us because we're working on of course multiple audits at a time so it saves us every day having to go out looking at 20 different Smart Sheet. We'll know nothing's happened on that one so I can leave that one alone and focus on a different one. So another nice feature that it provides.

Jamie Nau: So Kyle I am going ask you this one. So a lot of our listeners might have not gone through a 401(k) audit before. So can you kind of explain what some of these requests are? Like what type of things they need to pull? How difficult they are usually for them to find? I think they'd be really helpful.

Kyle Tanaka: So typical audit approach is we kind of look at the year's activities. So if there is a distribution to say 40 people, we'll want to test you know a sample size of about, like depending on a dollar amount it can vary. But yeah. So we ask for support for things like that. So making sure that the check is being sent to the proper person of the type of money whether it be pre-tax contributions or Roth contributions. We like to follow up and make sure those are being segregated based on the money type. So yeah we look at the approval, we make sure things the dollar amount is correct. There's people authorizing it and you know we just like to make sure that it's properly being handled. 

Jamie Nau: A lot of this stuff they have easy access to, right? So if I'm looking for that distribution, I can find the check copy and I can go and pull that up and show you that it was who it was said to us.

Kyle Tanaka: So yeah those are the easy things to kind of pull down. But the more complicated things are you know, things like death distributions. So typically you have to get a death certificate to release money to the state. So things like that. We also look at, which is why a Smart Sheet is great, is because we specifically can ask for those types of things for our audit.

Jamie Nau: So Kim the question back to you now then. So I talked about some of the items that they might be requesting. So what would be key for me as a potential client to be prepared for a 401(k) audit?

Kim Moore: You know it's tough for a client, so be prepared ahead of time for an audit because one of the requirements of an audit is that they all have to be unique, and we can't just do the same thing over and over again. What I tell people to do, the most important thing for you, is to make sure as a plan sponsor that you understand your plan. So key documents include the plan document itself, the adoption agreement, if there's a separate adoption agreement, summary plan description things like that that are your key documents describing how the plan works. Also you should be monitoring on a regular basis the activity going on in your plan and your sponsor or your provider will provide information to you in the reporting. Usually you have a link to some website that will give you all kinds of information. So you should be in there anyway, whether you need an audit or not. You should be in regularly monitoring to make sure that all the contributions are getting into the plan as Kyle mentioned, that distributions are proper, that there's nothing being distributed that you know, it's a termination distribution for an employee that's still working for you know that would be a key to say, oh I better be looking at this, that doesn't sound right. So just in general, I mean not, obviously you're not going to do an audit on every single transaction, nobody has time for that, but just in general monitor what's going on so when the auditors are asking you for various pieces of information you're not surprised by what they're asking for. You may not have at hand the exact piece of information we're going to be asking you for, but you should know where to get it. You should know the kinds of documents available, you should know the kinds of activity that you're planning. And the other thing I tell our clients and prospective clients is don't be afraid to go back to the auditor. You know if the auditor is asking you for something that just either you don't understand why they're asking, what do you need that for, or it just doesn't make sense. They're asking you for a participant loan information and your plan doesn't have loans, don't struggle with it and try to figure out what can I give them? Ask them, why do you need that? You know or are you asking for a particular payroll report? Maybe you don't have one exactly like that. Ask them, can I give you this instead. That maybe doesn't confirm exactly to what you've said but it hits most of the things that you know that may be sufficient because the auditor doesn't know what you have. So you know a good dialogue back and forth can save everybody a lot of time and a lot of frustration. And the auditors don't mind. I mean I think there's this kind of idea out there that you know, I better just give them everything they asked for and better not saying anything which isn't true. I mean the auditors, we're people too and we understand that for all of our clients they're not in the business of having a 401(k) plan. This is just a benefit that they offer and they want to do the job. But you know they're not experts on it. So feel free to ask us questions, push back on things you know ask, can I give you this as an alternative? A lot of times that will work just as well and like I said we'll save everybody a lot of time and frustration.

Kyle Tanaka: It's a lot of back and forth for sure.

Jamie Nau: Great. I think it's both key points one being organized. I think you know again I know when you're working with a client the more organized they are the better it's going to go the more smoothly it's going to go. If you sent them a request in the morning and they haven't pulled that afternoon. It makes life so much easier.

Kim Moore: And it's good for the client too because the quicker you do things obviously the quicker the audit can get done. But the longer it drags out everybody, you know, we all have short attention spans and short memories, and you'll forget what you asked and then you're going to ask the auditor and the auditor can't remember it and it just drags everything. It's not necessary, it just makes everything go smoother and it's less frustrating for everybody. The other thing I'd mention that we have seen over the last few years, I don't know if it's getting worse or just sticks out in my mind. Unfortunately you know you're auditing the 401(k) plan and so obviously you're going to need a lot of information related 401(k) plan that only makes sense. But if you think about how a 401(k) plan works, it's driven by the payroll of the company. So an employee that's participating in a 401(k) plan is going to say, withhold. Often it's a percentage of my compensation. So maybe 5 percent of my compensation don't pay it to me, put it into my account in the 401(k) plan. Maybe there’s a company match which is going to again be based off of your deferral amount which is based off your compensation. So we have to go back, a lot of the data we're getting is payroll data, H.R. data. It's in that space. So it's things like year-end payroll reports. Pay stubs, documentation like time reports for a particular pay period. How many hours did an hourly employee work? W-2 copies. Tax reporting, other tax reporting copy is like nine forty nine forty one reports. And unfortunately we find out as we're putting together these requests and talking to our clients they look at you and say, I didn't keep any of that. You know and it we're usually only a year out. So right now we're in 2019 we would be wrapping up to 2018 plan years so that you're 2018 calendar year and yet they didn't keep any W-2 that they issued to people in 2019 for the 2018 payroll. They didn't keep any tax reporting you know they didn't keep any pay information. So that's something I would encourage everybody whether again you need a 401(k) audit or not, keep your key payroll data any if you're going to switch payroll providers, which happens quite frequently. People will find another payroll provider that maybe offers a little bit better service, or maybe they're a little bit cheaper, and that's all fine. But you've got to remember just because you switch payroll providers it doesn't exempt you from providing all the information you had with that previous payroll provider, which may become very difficult at the time of the audit. It may cost you money because once you've left that payroll provider they may say, sure I'll give you copies of all those W-2 but it's going to cost just so many dollars per W-2 you know. So the companies don't think about those things when they're switching. They just think about the going forward part. They don't think about having to provide historical information. So those are things to keep in mind too, kind of pain points that we found in the audits from the client's standpoint.

Jamie Nau: Yes that makes a lot of sense. Sometimes it's that not easy to remember what you need to keep or not. So it's hard to go back and think, do I need to keep that? It’s always a tough question.

Kim Moore: Right. What surprises me too is that companies don't keep W-2, because I would think it's fairly common for an employee would come back and say, I'm getting audited by the IRS. I need a copy of my W-2. I didn't keep it, which surprises me too. but that does happen. So that's a very common thing for us. That payroll data and H.R. data to things like I9 copies just various things as you think you have an employee throughout their tenure with the company you're going to have the various different things that they're going to fill out, or information you're going to gather from them. Even things like an e-mail address. You know if we want to send confirmations we need an email. And quite often you say, oh you know I maybe had that at one time but I don't have a current e-mail. So all those kinds of things are important. So document retention policy. Very important.

Jamie Nau: Yes for sure. This last question is to you Kyle. So I know you're new to the distributed model for the audit. So anything else that's different? We talked about Smart Sheets, we talked about GoTo Meeting. Anything else that's a little bit different?

Kyle Tanaka: Just the everyday process is to me a huge improvement. My dream document is like everything is in electronic form. So you know when we would go out to the client's office we would, I have been stuck in a supply closet before, and you know the H.R. person has to drag up a huge box of just paper, and you know it takes time to go through that, but you know as a distributed model we can just look at PDF and then recognize text and then we can just control find from there. And you know there's a lot of scale of economy because the more we can do it's just easier. So yes just to me it's really streamlined and the air is a lot cleaner in my office too.

Kim Moore: You know Kyle I think you bring up a good point from doing things virtually in the distribution model we use. I mean it's good for us because we can have clients all over the country. Good for us from a staffing standpoint because we can have staff wherever we can get the best people because we're not limited to a certain geography close to an office. But it's good for the clients because you know, how many times have you had to have people, whether it's an auditor or a vendor or something, come in your office and then you got to worry about where am I going to put them? I don't want to wandering around. You know the last thing you want is an auditor wandering around your facility you know, looking at stuff you know, that was always a common complaint. So this way we can work at their time frame, what works best for them, and we don't physically have to sit there. If a client needs to reschedule because some big project maybe blows up and they need a little bit extra time before they get started on the for. Got it. You know we don’t have a plane reservation, waiting to get to their office. So we can reschedule fairly easily if we need to. We try not to do that, but if we need to just because of the urgency of something going on we can certainly do that. It’s a lot easier for us than when you physically go to the office. So it provides a lot of you know extra additional things you don't think about that are positives I think.

Kyle Tanaka: Yeah I think the clients are a lot less stressed. The most guilt I ever felt was during payroll runs I would have to go into the H.R. office and ask for a report. But all of their computers are all busy so you know they look at you really stressed are like, can you come back tomorrow? And I'm just like OK.

Jamie Nau: But I bet both you guys miss the free snacks in the kitchen. Those were my favorite parts. I had one client that had a free donut Friday. They brought a ton of donuts in and like I wouldn’t eat breakfast, I wouldn’t eat lunch I would be full of donuts that day. But I think it's been by six or seven years since I've done an audit. But it sounds way improved and much better and sounds like you guys are doing a great job out there.

Kyle Tanaka: Technology is a huge help.

Kim Moore: It's the future. Yeah it's the future of audit I think more and more audits are going to go this way or at least parts of audit will go that way. It just makes sense. I mean so many companies are virtual themselves so definitely you know physically going somewhere just doesn't make as much sense as it used to.

Jamie Nau: Well I definitely appreciate you guys taking sometime today to join us. We got a lot of good information out of this. I think like I said I've learned a lot more about the audit process. I do appreciate that. Thank you both for joining us.


What to expect from a 401(k) Audit

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