Yes, it’s audit time, and you’re swamped with auditor and plan sponsor emails, all clamoring for information on their plans. Your head is spinning; you need a breather.

How about a quick refresher?

You feel on solid ground given your team’s diligent recordkeeping… but somehow, there’s often that one thing that “upsets the apple cart.” Let’s start by understanding why audits matter in the first place. They’re time-consuming, tricky, and often a headache.

Changing Perspectives

Audits and 5500s are crucial for 401(k) plans. What exactly are they?

An audit is an independent review by a CPA to confirm your 401(k) plan is financially sound and properly managed. It also checks that the plan complies with IRS and Department of Labor (DOL) regulations. Not all plans require audits—more on that shortly.

A Form 5500 is the plan’s annual report filed with the IRS and DOL, detailing your plan’s financial position, operations, compliance, and participant counts—ensuring it meets federal requirements.

Though sometimes seen as “necessary evils” or just red tape, they serve important purposes. Retirement plans are valuable benefits designed to help employees build secure nest eggs. Managing them responsibly demands compliance, so audits and 5500s are vital. Mastering their preparation can turn these “necessary evils” into opportunities.

Why Audits and 5500s Matter

Audits and Form 5500 filings are more than just paperwork—they bring transparency, ensuring plans operate openly and are accountable to participants and regulators. They offer a window into plan administration.

Audits:

• Validate Compliance: The DOL and IRS take seriously their role in ensuring that retirement plans are financially healthy. An audit reassures them that you’re following the rules and helps you avoid penalties.

• Build Trust: Participants rely on you as their TPA to safeguard their retirement funds. A clean audit reassures them that their savings are managed well.

• Validate Financial Integrity: Auditors examine financial statements and transactions for accuracy to detect any irregularities or discrepancies that could impact the plan’s financial health.

• Assess Administration: Audits check that day-to-day processes—contributions, distributions, record-keeping—are accurate and abide by plan document provisions and government regulations.

Form 5500s:

• Assess Financial Health: Report on assets, liabilities, contributions, and expenses, help regulators verify the plan’s financial soundness.

• Monitor Operations: Provide details on provider fees and compliance tests to show how well the plan is run.

• Protect Participants: Give information about distributions and employer/employee funding which ensures benefits are timely and accurate.

Together, audits and 5500 filings promote transparency, accuracy, and fairness—critical to protecting benefits and ensuring plan compliance.

Form 5500 Filings

Form 5500 and 5500-SF follow similar filing procedures; the main difference lies in the number of schedules required, determined by plan size—the number of plan participants with balances at the start of the plan year determining whether a plan is considered “large” (5500) or “small” (5500-SF).

• Deadlines: Most 401(k) plans must file a Form 5500. The filing deadline is seven months after the end of the plan year. For December 31 year-end plans, the deadline is July 31 with a two-and-a-half-month extension available to October 15.

• Filing: All 5500s are filed electronically via the DOL’s EFAST2 system using plan sponsor credentials; both IRS and DOL receive copies.

• Timeliness: The filing deadline is strict and non-negotiable. Missing it can lead to severe penalties from both agencies, though the DOL offers some relief through its Delinquent Filer Voluntary Correction Program (DFVC) under certain requirements.

• Summary Annual Report (SAR): The SAR is a participant-friendly summary of the 5500, helping keep employees informed and fostering transparency.

The Importance of Planning

Effective advance planning is key for successful audits and 5500s:

• Understand Audit Requirements: Large plans (100+ participants with balances filing a 5500) require audits; smaller plans can file shorter 5500s (5500-SF) without an audit until they grow.

• Know Your Plan: Thorough understanding is key. Don’t assume you have it just because you’ve read the documents once. Pay special attention to critical areas prone to mistakes: compensation definitions, hardship withdrawals, and deferral remittance.

• Be Prepared: Conduct nondiscrimination testing on time and have all reports, participant statements, hardship requests, loan applications, and TPA certifications ready and easily accessible.

Audit Preparation

Think of an audit as a wellness check for your plan’s finances and operations. To keep things running smoothly, advance planning and preparation are key. Along with gathering requested documents, it’s helpful to be familiar with what auditors focus on:

• Financial Statements: Auditors confirm that assets, liabilities, contributions, distributions, and expenses are accurately reported and complete in the financial statements.

• Compliance: Auditors check if the plan operates according to its written plan document and complies with all provisions and government rules, including ERISA requirements.

• Fiduciary Responsibilities: Auditors assess whether plan sponsors and administrators are meeting their duties to act in the best interest of participants and beneficiaries.

• Eligibility and Participation: Auditors confirm that all eligible employees are included in the plan and that the records are accurate.

• Contributions: Auditors ensure employee and employer contributions are calculated correctly and deposited on time.

• Distributions and Loans: Auditors look at proper processing and documentation of distributions and loans, ensuring compliance with plan provisions and IRS rules.

• Documentation: Auditors review key documents such as plan documents, amendments, committee meeting minutes, service provider contracts, and communications to confirm completeness and accuracy.

Common Problem Areas

Typical pain points for TPAs, plan sponsors, and auditors include:

• Compensation: Handling of bonuses, fringe benefits, and manual payroll checks according to plan document provisions; one of the areas most prone to errors.

• Hardship Withdrawals: Insufficient documentation; ensuring employee self-certifications and approvals comply with IRS rules and plan provisions.

• Deferral and Loan Remittances: Monitor payroll remittance timing; late remittances require disclosure and early attention.

Common Audit Findings

Despite hard work, however, some audit issues persist, including:

• Failure to follow plan document provisions (compensation definitions, employee eligibility, and vesting).

• Late/incomplete remittances of employee/employer contributions causing compliance concerns.

• Inadequate or missing hardship withdrawal documentation.

• Errors in participant eligibility and coverage.

• Uncorrected nondiscrimination test failures.

• Loan administration errors (incorrect calculations, loans beyond plan limits).

• Late or incorrect plan documents/amendments/SPD distributions.

• Inaccurate or incomplete financial statements.

• Missing or incomplete participant and plan records.

Most of these issues stem from inadequate internal controls, highlighting the need for strong processes.

Wrapping It Up

Audits and 5500 filings aren’t just checkboxes, they’re vital tools that keep retirement plans fair, compliant, and trustworthy. By understanding what auditors look for and preparing carefully, plan sponsors and TPAs can avoid common pitfalls and protect their participants' futures.

Mistakes happen, but strong internal controls and using smart tools like Stax.ai can make the process simpler and more dependable. If you want to simplify your Form 5500 preparation and audit readiness, reach out to Stax.ai — we’re here to help you avoid those sleepless nights.

Stax.ai Supports Audit and 5500 Preparation

Stax.ai helps TPAs meet the challenges they face on a day-to-day basis as well as annual audits and 5500s. With its CX platform, Stax.ai can help you:

• Automate data collection and validation, reducing errors and manual workloads

• Centralize document management, ensuring audit-ready records that are easy to access for plan sponsors and administrators

• Provide real-time compliance insights, alerting TPAs to possible issues ahead of deadlines

• Generate detailed audit-ready reports, making preparation faster and less stressful

• Assist TPAs and plan sponsors in meeting complex requirements efficiently while reducing risk

Final Thoughts – Reframing Audits and 5500s

Audits and 5500s are essential compliance tools that help plan sponsors maintain plan compliance and participant confidence. Audits are busy, but they don’t have to be traumatic. And it’s not just about a single point in time. A successful audit is one you approach proactively with good administrative practices all year round.