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Your Company Needs a 401(k) Audit – What Now?

Hopefully, like us, you’ve had a few minutes to recover from last year’s October 15 401(k) audit deadline. Now it’s time to look back on how the audit process went for you. What went right or wrong? What can be done to ensure a better audit experience this year?

 

PriceKubecka performed over 400 audits in 2023. The most common error we saw was a failure to remit deposits in a timely manner.

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Late 401(k) contributor deposits. What does that really mean?

As it relates to large 401(k) plans (100+ active participants), the Department of Labor and the IRS are very strict about how long it should take your company to deposit an employee’s withholding into their 401(k) account. Here’s the actual rule for large plan filers.

All too often, our clients focus only on the second part of this rule – “but no later than the 15th business day of the following month.” Then they’re surprised and upset when we flag late deposits they’ve made. What the client should have doing is focusing on the first part – “Plan assets must be segregated as soon as administrately feasible.” Here’s why.

If you have remitted funds 3 days after the payroll check date, you’ve demonstrated to PriceKubecka, the Department of Labor, and the IRA that ‘as soon as administratively feasible’ for your company is 3 days. That’s your benchmark for the rest of the year. If next time you remit funds 10 days after payroll, that’s considered a late deposit, even though it’s sooner than the 15th business day of the following month.

Correcting late deposits on 401(k) deferrals.

Your auditor flagged a few late deposits in the 401(k) audit. Now what? As the plan sponsor you must consider correcting those late deposits. If you don’t, you may be out of compliance in the eyes of the Department of Labor and IRS.

If your plan had a deposit that was considered late  – for this example, we’ll say 7 days late – the Department of Labor expects the plan sponsor to calculate what monetary amount for the plan participant lost by not having those funds in the plan’s active investment accounts for those 7 days. Whatever that amount ends up being should be added to the employee’s account. As the plan sponsor, that amount is your correction, or ‘penalty.’

Your third party administror or recordkeeper can help you with corrections. However, if late deposits are pervasive across the entire year or multiple years, PriceKubecka advises that you also meet with an ERISA attorney to ensure everything is corrected properly.

Fixing the late 401(k) deposit problem permanently.

What happens if you don’t correct late deposits, or if they keep happening repeatedly, year after year?

If you don’t make some changes, you

Frequently Asked Questions

What should I do if I missed the October 15 Form 5500 deadline?

First, confirm that October 15 was actually your plan’s deadline and that a valid extension applied. If the deadline has passed, determine what is preventing the Form 5500 from being completed. If a required 401(k) audit is unfinished or hasn’t started, contact an experienced employee benefit plan auditor immediately and work with your other advisors to determine the appropriate filing and penalty-relief options.

Can you file Form 5500 after the deadline?

Yes. A delinquent Form 5500 can still be filed after its due date. Filing late does not eliminate the filing requirement, however, and potential DOL and IRS penalties may apply. Eligible plan administrators may be able to use the DOL’s Delinquent Filer Voluntary Compliance Program to reduce certain penalties.

What are the penalties for filing Form 5500 late?

The Department of Labor may assess substantial civil penalties for failure to file a complete and accurate Form 5500. Current Form 5500 instructions state a potential DOL penalty of up to $2,739 per day. The IRS can separately assess $250 per day, up to $150,000 per plan year, for certain late Form 5500-series filings. Actual penalties and available relief depend on the circumstances.

What is the DOL's Delinquent Filer Voluntary Compliance Program?

The DFVCP is a Department of Labor program that allows qualifying plan administrators to voluntarily submit delinquent Form 5500 filings and pay reduced civil penalties. Eligibility generally requires correcting the filing before the DOL has provided written notice of the failure to file.

What if my 401(k) audit hasn't started and the Form 5500 deadline has already passed?

If your plan is required to have an independent audit, missing the Form 5500 deadline does not remove that requirement. Contact an employee benefit plan auditor as soon as possible, explain that the filing is already late and determine what records are needed to begin the audit immediately. Work simultaneously with your TPA and other advisors to address the delinquent filing and determine whether penalty-relief options are available.

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