Unfortunately, the effects of the COVID-19 pandemic include layoffs. A recent post on the ForUsAll blog discusses how layoffs will affect 401(k) plan audits.
In the post, author Kimberly Moore, Director of Auditing at Summit CPA Group, calls it “imperative” that an employer that has a 401(k) plan and has laid employees off understands the effect of such personnel changes on a 401(k) plan audit, and adds that it is “vital” for such an employer to be equipped to get ready for an audit.
Moore expects that auditors’ likely reactions will include:
- Pulling bigger samples. Moore observes that as employees are laid off, the number of distributions and distribution amounts may increase. Such changes, she writes, are significant to auditors, since they base the samples they audit on how many transactions there are and how much money is involved. She expects that auditors examining such plans will pull larger samples of loans and distributions as result.
- Asking more questions. Auditors will be interested if new procedures and controls have been instituted because of the pandemic and likely will review them, says Moore. In addition, she writes, they also will verify that amid the effects of the pandemic, the controls relied upon in the past are still operating. As a result, she expects that auditors will ask more questions, as well as a longer amount of time for the process.
- Requesting additional disclosures. Because of the pandemic and its far-reaching effects, it may be necessary for an employer to provide more disclosures than it ordinarily would. These could include comments on market fluctuations or significant changes to the plan and a Going Concern Disclosure, which contains information about a company’s ability to operate in the future.
Action Steps
Moore suggests that employers take the following steps in order to prepare for an auditor, in light of the effects of the pandemic and any layoffs that have resulted from it.
- Understand controls and processes. Moore calls it “crucial” for an employer to understand the plan’s controls and processes and what has changed, and cautions that auditors will need to understand them. She considers this “a great time” to review benefit plan procedures and adapt them as necessary. Moore also emphasizes the importance of making sure that there is someone with knowledge of the plan’s processes and who has access to them, and adds that during an audit, it will be important to ensure that there is documentation of changes to procedures, personnel involved, controls and documentation used.
- Gather and maintain documentation. Make sure that all required documentation is available: where they are kept, who has them and how they can be accessed. Moore also notes that an auditor will need access to human resources, payroll and financial information concerning plan participants and plan administration.
- Make sure that appropriate people can access pertinent materials. Moore calls it “crucial” that an employer keep track of who has access to sites used for communication with a service provider, and observes that it is common for multiple sites to be used for that purpose. She underscores the importance of deactivating former employees’ accounts and access to the sites, and observes that doing so can help reduce the threat of fraud and identity theft.
- Make sure disclosures are accurate. Moore reminds that Forms 5500, and the information they contain about an employer and its plan, are available for the public to see.
- Contact with the auditor. Moore suggests contacting an auditor before an audit takes place, since auditors’ schedules may have changed due to the pandemic, and also may be working remotely. Doing so, she suggests, can help ensure that an audit goes smoothly.
