A human resource team preparing docments for the employee benefit plan audit


As a plan administrator for a 401k plan, you want to ensure all benefit plan audits begin without errors or noncompliance. What do you look for to bypass costly mistakes? Here are three of the most common employee benefit plan audit problems and how to avoid them.


1: Eligible Compensation

When administering an employee benefit plan audit, also called an ERISA audit, one of the most common problems is the misapplication of the plan’s definition of eligible compensation. For example, a company’s plan document may permit deferrals calculated on items such as bonuses. However, the company’s payroll department did not make this withholding. 


How do I avoid a problem with eligible compensation?

To avoid this potentially costly error, initiate annual reviews of compensation definitions and ensure the department in charge of determining compensation understands the plan document and follows it. A company utilizing a third-party payroll company or software will need to receive communications of any adjustments to plan compensation so that automated withholdings are done appropriately. In addition, consider the services a third-party administrator (TPA) has agreed to provide and ensure consistency on what is defined as eligible compensation. 


2: Failing to Enroll Eligible Participants

Another common error when auditing employee benefit plans is when a company fails to add an eligible employee to their 401(k) plan participants roster. The failure to provide an enrollment avenue or to put a worker’s selection into effect is an operational mistake that jeopardizes the tax qualification of a 401(k) plan.


Be clear about who is considered an eligible employee

The IRS has stipulations around who is considered an eligible employee for an employee benefit plan. According to their rules, any employee that meets the following criteria must be allowed to participate in the 401(k) plan:

  • Has reached 21 years of age
  • Has completed one year of service
  • Has worked for at least 1,000 hours over a 12-month period

If an employee meets the criteria above, they must be allowed to enroll in a company’s 401(k) plan.


How do I avoid enrollment errors?

The best way to avoid an enrollment error during an employee benefit plan audit is to enroll eligible employees in the 401(k) plan as part of a new hire onboarding process. This process should be completed as soon as the employee meets eligibility requirements and be well-documented.

Enrolling eligible employees in an employee benefit plan is essential to avoid audit problems, but it is also the law. Eligible employees must be allowed to participate, so have a process to guarantee this happens.


3: Timeliness

Deadlines are essential in an employee benefit plan audit. The IRS has specific deadlines, and missing them can result in significant penalties.


What are some of the key audit deadlines?

Here are a few critical employee benefit-plan audit deadlines to monitor:

  • Eligibility: Employees must be allowed to participate in the 401(k) plan as soon as they become eligible.
  • Enrollment: Employees must be enrolled in the 401(k) plan within 30 days of eligibility.
  • Deferrals: Elective employee deferrals must be withheld from pay and contributed to the employee’s account as soon as administratively feasible, but no later than the 15th day
  • of the month following the pay period in which they were withheld. 
  • Employer contributions: Employer matching or profit-sharing contributions must be contributed to employee accounts no later than the earlier of (a) the last day of the year or (b) the due date (including extensions) for filing the employer’s federal tax return for the year.
  • Audit filing: Form 5500 and employee benefit audit must be filed on the last day of the 7th month following the end of a plan year to comply with government regulations. The most important deadline for most businesses whose fiscal year is a typical calendar year (ending December 31) is July 31. Plan sponsors can request an extension to October 15 by filing Form 5558.


What is the best way to avoid benefit-plan penalties?

Be aware of the 401k plan audit deadlines and create a process to track them. Monitoring these essential deadlines and creating reminders can help avoid costly penalties for missing deadlines. 


Questions About Your Employee Benefit Plan Audit?

At Assurance Dimensions, our goal is to help you successfully manage your employee benefit plan with a well-planned, low-stress, and timely audit that meets all regulatory requirements.

Contact us if you have any questions about employee benefit plan audits or compliance. Learn more about our benefit plan audit services.