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There comes a time when a 401(k) plan “grows up” and transitions from a small to a large plan under the Employee Retirement Income Security Act (ERISA). Typically, the change in classification occurs when a plan exceeds 100 eligible participants at the beginning of the plan year. Although there are certain exceptions, such as the 80/120 rule, most plans will be subject to the requirement as the plan grows. These audits must be performed by an independent Certified Public Accounting (CPA) firm and ensure it operates according to established rules. The process often includes a review of plan documentation and amendments, validation of the proper payment of distributions, participant sampling, and much more.
When searching for a plan auditor, it is common to receive proposals for varying amounts, all for the exact same service. In evaluating proposals, many wonder what factors affect plan pricing. While each auditor adheres to its own strategy, several factors impact pricing. These include whether it is a first-year audit, the type of audit needed (full scope v ERISA Section 103(A)(3)(C)), and the number of active participants, amongst others. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
401(k) Audit Cost Drivers
- Plan Audit Type – There are two types of 401k plan audits which include a full scope and the ERISA Section 103(A)(3)(C) audit, formerly known as a limited scope audit. The former requires the auditor to conduct testing in all areas of the audit. The latter does not require testing of information certified by the trustee or custodian, which typically includes investment balances and investment income. When a certification from the trustee or custodian is obtained, the audit requires fewer hours to complete, resulting in lower costs.
- Number of Eligible Participants – The more eligible participants in a plan, the greater the amount of audit work that impacts pricing. Although many believe that active participants (those currently participating in the plan) need to be tested, the truth is that it is eligible participants. This includes former employees with an account balance, those currently participating, and eligible individuals not currently participating. Therefore, the participant count should be based on eligible participants, not other types.
- First-Year Audit – Many are surprised to learn these audits can be more costly because of the additional work required. Time is needed to become familiar with the plan, including provisions and service providers, such as the payroll company, plan trustee, custodian, recordkeeper, and their internal control environments. In addition, opening balances must be tested, which occurs via an audit of prior year transcriptions.
- Payroll Provider – It may be surprising to learn that using a national payroll provider often results in time efficiencies. This is true because audit fieldwork requires a review of the provider’s certification for each engagement. However, since national payroll providers have many clients, it’s more likely that the required information has already been reviewed. In addition, a SOC 1 Type 2 report, which provides additional assurance about the quality of internal controls, is often available.
- Payroll/Recordkeeper Changes – It is also important to know that recent changes to the plan’s recordkeeper or payroll provider often result in additional costs. This is because ERISA mandates that a one-time testing procedure be conducted on relevant transactions.
We’re Here to Help
Several variables impact the amount of work that must be tackled to complete a 401(k) or other benefit plan audit. While each audit firm uses its own pricing structure, the factors above can help you estimate your upcoming audit costs. If you have questions about the information outlined above or need assistance with your next 401(k) plan audit, JLK Rosenberger can help. For additional information, call 818-334-8646 or click here to contact us. We look forward to speaking with you soon.