How Layoffs Will Impact Your Upcoming 401(k) Plan Audit

Author: Siân Killingsworth / 3 Aug 2020 / Business

If your company has been forced to lay off employees during the coronavirus pandemic, you can expect closer scrutiny from your 401(k) plan auditors this year.

Be prepared to provide more financial documentation than usual, including information on vesting, benefit disbursement, and investments.

The auditor will look to make sure the plan is operating in accordance with the plan-related documents, the Department of Labor requirements, and Internal Revenue Service regulations. Most plans are subject to passing annual IRS nondiscrimination tests to prove that the 401(k) plan is not merely a tax haven for Highly Compensated Employees, but rather, serves as a benefit to all. Form 5500 will be assessed to ensure all financial information has been reported accurately and completely.

If your 401(k) plan has 120 or more eligible participants on the first day of the plan year, an audit is required. Once you’ve been audited, you will be subject to the same procedure every year unless the eligible participant number dips below 100.

How Layoffs Can Impact a 401(k) Plan Audit

If you’ve laid off workers this year, you can expect 401(k) plan auditors to:

• Pull bigger samples – When employees are laid off, the number of distributions and the distribution amounts tend to increase, attracting the attention of auditors. Auditors base the samples they audit on the number of transactions and total dollar amounts, so they may pull larger samples for testing purposes.
• Request additional disclosures – One of the key reasons for a 401(k) plan audit is to protect employee benefit plans from fraud, such as misappropriation of assets or fraudulent financial reporting. Additional financial documents may be required to provide context about the plan’s vesting, eligibility requirements, benefit disbursements, and valuation of investments.
• Vesting may be scrutinized – If 20 percent or more of your employees were laid off, it is considered a “partial termination” and the IRS requires that affected employees become immediately fully vested.
• Ask more questions – Any new procedures of controls added to the plan amid the pandemic will go under a microscope. Auditors may ask what market fluctuations and concerns prompted changes to the 401(k) plan. They will be checking to see that all the old methods were followed by the letter up until the time the formally requested change kicked in.

How to Prepare for the 401(k) Audit after Layoffs

Large plans have until July 31, 2020, to complete their audits. If an extension is filed, they can have until October 31 to have the plan assessed.

Auditors will need access to HR, Payroll, and Financial information for each employee in the plan. You’ll need to provide:

• Executed plan documents and amendments
• The current year census
• Last year’s Form 5500
• Distribution forms
• IRS determination letter
• Participant statement and trust reports
• Plan sponsor financial statements
• W2s and annual payroll registers
• Loan documents
• Certification reports for the plan custodian
• Discrimination tests
• SAS 70 report
• Form 1099 for distributions

In addition to assembling all of the above documents, here’s how employers can prepare:

• Put a person in charge of process review: It’s imperative that a point person who understands all plan processes is on hand to answer any questions the auditor may have. Maybe this person is someone in HR, or maybe it’s your 401(k) plan provider. Have that responsibility clearly delegated. Now is also a good time to remove access to plan website for laid-off employees (if you haven’t already) and review security measures designed to prevent fraud.
• Contact your auditor as soon as possible: Auditors are likely under compressed schedules due to the COVID-19 crisis and may even be working remotely from home. It’s wise to reach out with any questions about the auditing process as soon as possible to ensure everything runs smoothly.
• Contact your 401(k) plan provider: Now that you have fewer employees, the contributions from Highly Compensated Employees may start looking a bit top-heavy. Your plan provider can help you perform projections through the end of the plan year to determine whether failure is imminent and even add a Safe Harbor provision to help you avoid testing altogether.

Do you have additional questions about 401(k) plans, layoffs, and furloughs? Contact Ubiquity for assistance.