Frequent 401(k) Audit Finding Series - Documentation Failures
During our 401(k) audits, we see failures occurring at both the plan level and the participant level. Documentation failures arise when transactions occurring in the plan can’t be supported by written direction.
Plan Level Observations
Sometimes, plans need to be amended because of a change in law. When legislative changes are driving plan amendments, we would anticipate the author of your Plan document (usually record keeper or TPA) will likely inform you that a Plan amendment is needed.
Other times, plans are amended to make the plan better meet the needs of the employee or sponsor. If you, as the Plan Sponsor, determine a change would make the Plan more efficient or attractive to employees (for instance, adding additional features), a review should occur to determine if a formal amendment is needed. If you conclude that an amendment is needed, you should work with your record keeper (or third-party administrator) to determine the best course of action.
We recommend retaining executed versions of all amendments, adoption agreements, and any subsequent restatements for the life of your Plan (and beyond).
Participant Level Observations
A best practice for any Plan sponsor is to familiarize yourself with the documentation relating to all transactions affecting your Plan. One area to especially watch is employee deferrals. Most record keeper systems allow employees to enroll and change elections directly on their online platform and will have an audit trail supporting the participant’s wishes.
But what happens when your employee drops in your office and asks you to change their 401(k) deferral, and, no, they didn’t have time to login to the record keeper site? While you may be tempted to assist, making the payroll change based solely on a verbal request is not advisable.
There are options you can give your employee when this occurs. One course is to assist them in making the change by logging into their online participant record. Alternatively, you could obtain some kind of written instruction from the employee giving permission for you to make the change (email or a signed request). Employees responsible for processing payroll also need to be familiar with the proper ways to direct employees asking for deferral changes.
If you make a deferral change bypassing your normal processes, you (or your employee) should update the record keeper’s online system with the same information so the record keeping system mirrors what is occurring in payroll.
In addition, it is a best practice, to annually compare the deferral percentages in the recordkeeping platform to the payroll system and research any discrepancies.
If your Plan has auto enrollment, you may encounter employees who circumvent the normal process by verbally telling you that they don’t want to participate. If you choose not to auto enroll the employee, you are exposing the organization to potential future problems when you don’t have this election in writing. At minimum, request the employee to email you stating their wishes. Preferably, insist they log into the record keeper system and formally opt out of participating.
No one wants to hear a governmental examiner tell them “if it wasn’t documented, it wasn’t done”. Accordingly, it will always be in your best interest to have written records versus going with verbal direction. By amending your Plan when necessary and having proper support for participant level changes, you can comply with employee wishes and administer the Plan in an effective way that meets your fiduciary responsibilities.
Nancy C Dufek, CPA | 03/12/2019