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Virtual Accounting Blog

SOC Reports-Why It’s Important to Your 401(k) Plan

What is a SOC Report? It’s a Report on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting.

Many third-party providers such as record keepers, custodians, or trustees will have an “SOC Report” prepared to provide information related to the internal controls over specific portions of their internal operations.

Typically, these reports provide a description of the internal controls in place over functions such as;

* A new plan setup

* Accuracy of participant transactions

* IT controls (access security, program changes, backup, daily maintenance)

* Daily asset pricing

* Custody of assets

* Reconciliations

Various other controls specific to the responsibilities of the third-party provider. 

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Limited Scope Asset Certification

What should you do when your retirement plan auditor asks, “Can your plan audit be conducted using the ERISA limited scope provision?” 

First, verify who the asset holder/custodian/trustee is for your Plan. If that entity is a bank, insurance company or trust company, they may be able to provide the necessary asset certification.  The institution will need to provide a certification which will read “XYZ Bank/Insurance Company/Trust Company hereby certifies that the foregoing statement furnished pursuant to 29 CFR 2520.103-5(c) is complete and accurate”. 

The statement must be signed by an individual authorized to represent the institution.  The words “complete and accurate” must be included.  Since a limited scope audit will be less costly and take less time to complete than a full-scope audit, it is worth the effort to verify the limited scope option will work for your Plan.

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What is a Limited Scope Audit?

One of the first questions you will be asked when you need an audit of your 401(k) Plan is:  “Can I have the audit completed as a limited scope audit?”

ERISA (the Employee Retirement Income Security Act of 1974) allows auditors to conduct a limited scope audit of employee benefit plans if the investment information has been:

* Prepared and certified by an institution that is regulated, and

* Supervised and subject to periodic examination by a state or federal agency. 

Entities that can be qualified to provide this certification include:

* Banks

* Insurance companies, and

* Trust companies.

Exclusions from this ERISA provision are Broker-Dealers and Investment Companies.

A limited scope audit will be less costly and take less time to complete than a full scope audit so it is worth some time to investigate if your audit can be completed using the limited scope option.

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Streamline Your 401(k) Audit

Business owners that offer retirement plans to their employees already have a lot on their plate doing the day-to-day operations. Hiring an inexperienced auditor will only take up more of that valuable time. To avoid costly kimberly_moore-resized-170.jpgmistakes it’s important to hire an experienced auditor to audit your retirement plan. At Summit CPA Group, we specialize in auditing. We are dedicated to provide efficient and effective employee benefit plan audits.

Our experienced auditors understand the intricacies of your benefit plan. We have more than 100 audit clients and that list is growing. For your convenience, our auditors work remotely. We have to ability to assist you entirely “off-site” with little or no distraction to your daily office routine.

To request and gather the information for the audit, we use a specially designed tool

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Speed Up the 401k Audit Process

There are a lot of complex aspects that go into creating and maintaining a successful 401k plan for your business. The same is true for the auditing process. Most plan administrators find the auditing process to be a bit intimidating and stressful. They can’t wait for the auditing process to be completed so that things can get back to normal. So if you’re feeling stressed out, you’re not alone. Here are some pointers to help speed up the audit process.

* Getting started. As soon as you know your 401k plan is going to have to be filed as a “large” plan and required to undergo an audit, begin preparing. Nothing can add stress to the audit like waiting last minute to get it done. Especially since the penalties for submitting a late audit report can be severe.

* Find a CPA firm that specializes in 401k audits. Finding the right CPA firm can make a world of difference in your 401k audit experience. Choose a firm that specializes in 401k rules and audits. They’ll have the know-how to guide you through the steps from start to finish. You may also want to consider a firm that can perform the audit off-site, to make the process less disruptive to your workspace.

* Create a strong 401k administrative committee. One of the first things you should do is to create a strong administrative committee. The committee should consist of high-ranking, experienced members from related departments (HR, Finance, etc.), with each member aware of their tasks and deadlines. This committee should review items like investment performance, plan controls, third party provider service levels, etc. Providing information like meeting minutes from this committee can help speed along your audit.

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Form 5500 Filing Reminder

If your business offers your employees a benefit plan, there is an important filing deadline coming soon. Are you prepared?

Employee Benefit Plan Administrators must file IRS Form 5500 each year. Form 5500 must be filed by the last day of the seventh month after the end of the plan year. If the due date falls on a weekend or national holiday, the due date would be extended to the next business day. For plans that follow the calendar year (January through December) Form 5500 is due on July 31.

If you discover your plan needs an audit for the plan year or you just need more time to file form 5500 you will need to contact your plan’s administrator (record-keeper) to file an extension using application Form 5558, to ensure the plan remains in compliance.

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Reviewing a 401k Audit Report

After you independent auditor has completed your audit, you should receive a report. Your report will contain the auditor’s opinion of the plans financial statements, your plans required reporting schedules, and any required supplemental schedules. They should also provide information regarding and any important problems or errors that were found. The auditor should provide suggestions for ways to improve the plans operations and internal controls. After reviewing the information provided you may have questions for your auditor. Such as;

* Were the plan contributions received in a timely manner?

* Were benefit payments made according to the plan terms?

* Were the participant accounts fairly stated?

* How will any issues found impact the plan’s tax status?

* Were there any transactions that are prohibited by ERISA identified?

* Were plan obligations been properly described and stated?

* Are the plan assets been fairly valued?

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Full Scope vs. Limited Scope

When you own a business that offers employees a 401k or other retirement plans, it’s a good bet that there may be an audit in your future. The question is, what kind of audit will be needed for your plan? Will you need a full scope or a limited scope audit for your plan?

* Limited scope. A limited scope audit (LSA) covers a full year period and all plan operations but requires less audit work related to the investment year-end balances and investment income. A limited scope audit can be done if an asset certification from a qualified institution will be available. In many cases the limited scope is an option for plans but they must verify that before the audit begins. 

* Full scope. The full scope audit (FSA) includes the same items as the limited scope audit but also includes full testing in the investment area over year-end balances and investment income. If a certification from a qualified institution is not available, a full scope audit must be done. A full scope audit requires more work, therefore increases the overall fees for the audit.

To determine which audit you need, you will need to establish who holds your investments. If your 401k plan investments are held by a regulated trust company, a bank, or an insurance company, you may be allowed a limited scope audit. These three institutions are qualified to certify the accuracy and completeness of your plans investment information. However, broker and investment companies are not qualified to certify plan investments for a limited scope audit.

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Common 401k Compliance Errors

Being the administrator of the company retirement plan can be quite complicated and time consuming which may lead to errors. The IRS has listed 12 of the most common compliance errors found in retirement plans. The most common errors found are, the failure to:

* Follow the plan document terms in operation.

* Make routine deposits of employee elective deferral amounts on a timely basis.

* When a plan is “top heavy”, make mandatory minimum employer contributions to the plan.

* Handle all deferral allocations and deferral elections in a plan, using the same definition of “compensation”.

* Make a deferral election that results in a lost deferral opportunity that includes “all” eligible employees in the plan.

* Under Section 402(g) limit amounts for a calendar year, as well as the failure to make all required distributions of any deferrals that exceed the limits, to any affected plan participants.

* Make matching contributions to all appropriate employees by an employer.

* Update the 401k, required plan documents with the mandatory laws that govern the 401k plans.

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Fidelity Bonds- Who Needs Them?

By definition a fidelity bond is insurance to cover losses that result from fraud. It is used by businesses to cover losses due to the actions of a dishonest fiduciary employee. Fidelity bonds are used to protect the assets in the company retirement plan due to fraud by a fiduciary that has access to plan assets such as; cash, checks, and property. For example; a fiduciary that has the authority to make decisions to transfer or negotiate plan assets as well as disburse plan funds and sign checks.

It’s of vital importance that those responsible for obtaining and maintaining the fidelity bonds have adequate knowledge of bonding rules. According to the IRS, fiduciaries handling pension funds are required by Title 1 of ERISA to be bonded unless they are one of the few limited exemptions. The bonding amount should not be less than 10% of the amount of funds handled and in no event less than $1,000 nor more than $500,000 (unless the Plan holds employer stock in which case the bond amount is increased to $1,000,000).

It’s important to note that there may be serious consequences when an ERISA fidelity bond is not sufficiently maintained sending a red flag to the DOL to have a closer look at the plan. In addition, if the retirement plan has more than 5% non-qualified assets that are not listed accurately on the bond application, this could be present a serious underwriting risk to the plan and you could be denied coverage. This is because non-qualified assets carry a higher risk of loss.

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