Key Takeaways
- Late contributions are preventable and may trigger Employee Retirement Income Security Act of 1974 (ERISA) prohibited transactions, excise taxes and Form 5330 reporting without strong remittance controls.
- Operational errors from misaligned plan documents — including eligibility, compensation and vesting issues — increase compliance risk and require regular reviews after payroll or HR changes.
- Payroll data accuracy and timely documentation drive audit efficiency, while reconciliations and proper forfeiture use support Internal Revenue Service (IRS) and ERISA compliance and reduce audit findings.
A retirement plan audit should not be stressful, disruptive or full of surprises. We consistently see recurring issues such as late or incomplete data, payroll inconsistencies and delays in providing documentation that can significantly impact the audit process. These challenges often lead to delays, increased costs and heightened compliance risk for plan sponsors.
Based on our experience working with retirement plan sponsors, we share five things your retirement plan auditor wants you to know.
1. Late Contributions Are a Preventable Finding
Employee deferrals must be remitted to the plan as soon as administratively feasible. Late contributions are commonly caused by payroll processing delays or inefficiencies, cash flow challenges within the company or a lack of internal controls and oversight. These issues can lead to several significant consequences. Most notably, late contributions are considered prohibited transactions under the Employee Retirement Income Security Act of 1974 (ERISA), which can trigger regulatory implications.
From an audit perspective, late contributions may result in management comments or rise to the level of a control deficiency or material weakness, depending on severity and frequency. A control deficiency is a weakness in internal control but not severe enough to pose a reasonable risk of material misstatement, whereas a material weakness is a more serious deficiency where there is a reasonable possibility that a material misstatement will not be detected in a timely manner. Additionally, late contributions require the calculation of lost earnings, which may be subject to excise taxes, typically 15%, and reported on Form 5330.
Plan sponsors should establish a consistent, documented remittance timeline — and stick to it.
2. Operational Errors Matter More Than You Think
Plan sponsors must operate their plan according to their governing documents, which may include the plan document, adoption agreement or summary plan description, depending on the plan design. When a plan isn’t operating according to its written document, an operational failure may occur even if it was unintentional. The most common examples of operational failures include:
- Exclusion of eligible employees
- Using incorrect compensation for employee deferrals or employer contributions
- Failing to implement auto-enrollment properly
- Vesting errors
These errors are frequent and often discovered during audit testing. It is important for plan sponsors to review eligibility, definition of compensation and employer contribution calculations on an annual basis (and more frequently) — especially after payroll, HR system or plan document changes.
3. Payroll Data Drives the Audit
Payroll plays a critical role in a retirement plan audit as it serves as the primary source of data for contributions and eligibility. Auditors rely heavily on payroll data. If payroll is not set up correctly, errors related to the plan may follow. Common payroll-related issues include errors with:
- Deferral percentages (often due to manual updates)
- Payroll codes (included/excluded in compensation)
- Census information
- Loan repayments
Effective coordination among payroll, HR and the plan’s recordkeeper, combined with robust internal controls over payroll processes, is essential to ensuring a smooth and efficient audit. In addition, plan sponsors are encouraged to perform periodic internal reconciliations between payroll reports and plan records, not just on an annual basis.
4. Forfeitures Must Be Used Timely
Forfeitures in retirement plans arise when participants forfeit nonvested employer contributions, which typically occur when an employee terminates employment before becoming fully vested. These forfeited amounts are kept within the plan and can be used in accordance with the plan provisions, such as reducing future employer contributions, paying for administrative expenses or reallocating amounts to participants.
It is important for plan sponsors to track and review forfeiture balances consistently throughout the plan year and coordinate with the plan’s recordkeeper/third-party administrator (TPA) to ensure forfeitures are applied timely and appropriately. Timely monitoring and utilization of forfeiture balances helps ensure the plan remains in accordance with ERISA and IRS requirements.
Plan sponsors should prepare ahead of time for how forfeitures will be used each year, which may help avoid potential compliance issues.
5. Quality Data, Quality Results
For an auditor, there are several reasons why quality data matters when completing an audit. Key reasons include:
- Accurate financial reporting
- Compliance
- Efficiency in the audit process
- Reliable participant records
- Reduced risk of audit findings
To prepare and issue a complete and accurate audit report, documentation received from the plan sponsor must be reliable and contain information needed for audit procedures to support an accurate conclusion on the data. Ultimately, when auditors don’t receive the required documentation, it creates multiple follow-ups, audit delays and potentially increased audit fees.
Quality data supports an efficient audit process and more reliable conclusions that the plan is compliant and managed properly. Plan sponsors can stay organized by meeting regularly with their auditors, requesting the audit list early and assigning clear internal ownership and due dates for each item.
In Closing
A successful retirement plan audit is driven by proactive planning, strong internal controls and consistent oversight of key processes. By keeping the audit a priority, plan sponsors can significantly reduce the risk of audit findings, compliance issues and risks related to late IRS Form 5500 filings (such as potential penalties). Ultimately, attention to these critical areas not only facilitates a smoother, more efficient audit process but also reinforces the overall integrity and effectiveness of the plan’s administration.
We Can Help
Addressing these common challenges requires more than a reactive approach; it calls for proactive planning, strong internal controls and ongoing coordination across all parties involved in plan administration. In practice, PKF O’Connor Davies professionals work closely with plan sponsors to identify gaps early and enhance communication between payroll/HR and service providers. By taking a forward-looking approach, plan sponsors can improve audit readiness and streamline the overall audit experience.
Contact Us
If you have any questions, please contact your PKF O’Connor Davies client service team or:
Ashley Mayer, CPA
Partner
amayer@pkfod.com | 914.341.7094
Camille Esposito
Supervisor
cesposito@pkfod.com | 914.341.7614
Taylor Duffy, CPA
Senior Associate
tduffy@pkfod.com | 914.341.7674