Go beyond a basic 401(k)

Go beyond a basic 401(k)

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5 min read

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

Kimberly Moore – Guest Author
May 18, 2020
How Layoffs Will Impact Your Upcoming 401(k) Plan Audit
Table of contents

Due to the current coronavirus pandemic, many businesses have been hit hard financially and are trying to navigate the impact of operating with a significantly reduced income. Unfortunately, the financial challenges many companies are experiencing are forcing these employers to lay off employees. With that said, if you’re a business that serves as a 401(k) plan sponsor and has had to lay off employees during the pandemic, it’s imperative that you understand how these layoffs will affect your 401(k) plan audit.

It’s also vital that you have the knowledge and tools needed to prepare for the upcoming 401(k) plan audit. Highlighted below is information on what you can expect from your auditor during the next 401(k) plan audit, as well as what you can do to prepare for it.

What to Expect

As the COVID-19 pandemic rages on, and you are forced to lay off employees, these layoffs will continue to impact your 401(k) plan audit in different ways. Your 401(k) plan auditor will be taking into account any significant changes made involving your plan participants. Listed below are a few things you can expect to experience during your upcoming audit, including insight into how your auditor will most likely react to specific plan changes:

  • Auditors will most likely pull bigger samples. As you let go of more employees within a short period, you may see an increase in the distribution amounts taken by your plan participants and the volume of distributions taken may increase. Plan participants may also choose to roll their current participant loans into a distribution. This increase in volume and distribution amount is significant to auditors, because auditors base the samples they select to audit on the number of transactions and total dollar amount. Therefore, your auditor will probably pull larger samples of these loans and distributions for testing purposes.
Make sure you can maintain someone with knowledge of the 401(k) processes to support the audit or retain access to them even if they have been furloughed.
  • Auditors will probably ask you more questions. Auditors will most likely review any new procedures or controls added due to the pandemic. They will also need to verify that the controls they relied upon in the past are still operating given all the changes in staffing and operations due to the crisis. This will most likely result in more questions and additional time that you will need to spend to support the audit. Keep in mind that even though you may have furloughed staff that previously worked with the 401(k) plan, your auditors will need to understand the processes and controls that existed during the plan year they are auditing. Therefore, it’s crucial that you understand all of the controls as a plan sponsor, from long-standing, general protocols to processes that have recently changed. Auditors will want to focus on these controls, understand them, and talk to someone who has experience with these processes. Make sure you can maintain someone with knowledge of the 401(k) processes to support the audit or retain access to them even if they have been furloughed.
  • Auditors will need to consider additional disclosures. Financial statements are required to include various disclosures explaining the numbers in the financial statements. These disclosures support the statements and provide context and additional information to the financial statement readers to ensure they can interpret the amounts in the statements accurately. These disclosures need to include information about the plan from the time period covered by the audit to the present day. Due to the severity of the pandemic and its impact on the general economy and financial markets, you may need to include additional disclosures that are outside the normal disclosures you are used to. Your auditor will want to discuss these requirements with you and assess the need for inclusion of any additional information. These disclosures may consist of comments on market fluctuations or potential changes to your plan that were significant, among other things. Also, depending on the impact to your company from the stay at home orders in locations throughout the country, you will need to consider if a Going Concern Disclosure, which contains information about a company’s ability to operate going forward, is required. While these types of inquiries and filings are more common at the present moment, it is crucial that you prepare for these discussions given that the public can access and view your 5500 audit report. For this reason, it’s best to avoid including any statements that are misleading about the financial position of your company.

How to Prepare

Currently, there has been no change in the deadline for the upcoming 2019 401(k) plan audits. Therefore, to prepare for your forthcoming audit given the staff changes your company is experiencing, we at Summit CPA recommend doing the following:

  • Gather and maintain all relevant documentation. When it comes to preparing for an audit, ensuring that you have all the required documentation on hand to give to your auditor is essential. Frequently, plan documents live in the ether and are hard to track down when needed. Therefore, we recommend knowing before your audit where your documents are located, who has them, and how you can access them. The auditor will also need access to Human Resources, Payroll and financial information related to all employees, specifically to participants in the plan and also information related to administration of the plan. This preparation is especially important as the staff that are most familiar with this documentation may not be available.
  • Revisit your processes. Now is also a great time to review your benefit plan procedures and adapt them to fit your changing employment environment. For example, if your company recently transitioned to a remote work environment in light of the pandemic, you may have made changes to the processes used for your plan. It will be important during the audit to ensure you have documented any changes in procedures, personnel involved, controls and documentation used. You may also be required to remove access to plan websites for staff that are furloughed and allow new staff that access. In those instances, it’s imperative that you make sure the person or people taking over for those who are now separated from the company know and fully understand the current processes in place, and they have the access required to locate all the necessary information required for the audit.
We recommend reaching out to your auditor as soon as possible if you require an audit for the 2019 plan year.
  • Ensure the appropriate people have access to pertinent materials. It’s not uncommon for plan sponsors to use multiple sites to load information or receive information from service providers. Using these various websites regularly makes it that much easier to forget to deactivate access for former employees. Therefore, it is crucial that you keep track of who has access to any sites you use to send or receive information from your service provider. Doing so can help ensure that the correct people have the access they need to oversee your company’s 401(k) plan. Also, deactivating the accounts of former employees can reduce the chance of fraudsters accessing the information on the website to perpetrate identity theft or other fraudulent activity against the plan and/or plan participants.
  • Contact your auditor. We recommend reaching out to your auditor as soon as possible if you require an audit for the 2019 plan year. Due to the coronavirus, many auditors are operating on a more compressed schedule, as deadlines for specific filings have been pushed back, and later deadlines remain the same. The fluctuations in the schedule for said filings may cause your auditor to push your audit back, or they may not be able to proceed with conducting your audit at all given their workload. Therefore, it’s vital that you check in with them to see if there will be changes to their audit schedule and whether they’ll be able to conduct your audit this year. Moreover, since most firms have transitioned to a remote work environment, many auditors are working from home and may not have direct access to their physical office space. Therefore, it’s imperative that you and your auditor discuss how the audit will proceed this time around to ensure the audit goes smoothly.

As you continue navigating the unpredictable terrain of the coronavirus pandemic, it’s imperative that you take into account how staff changes will impact your 401(k) plan and audit as a plan sponsor. Adequately preparing for your 401(k) plan audit will ultimately spare you from potential headaches caused by the process down the road. You can learn more by viewing, "Layoffs & Your 401(k): What You Need to Know," a webinar we co-presented with the folks at ForUsAll.

Summit CPA Group specializes in virtual 401(k) audits. Proudly serving companies across the US, we can help your business determine whether a 401(k) audit is required, and help you complete the entire 401(k) auditing process with more than enough time to file the results with IRS form 5500.

Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.
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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.