Many companies offer their employees the opportunity to participate in a 401(k) retirement savings plan. These plans allow employees to play an active role in planning for their retirement by making regular contributions to their account. These plans undergo financial audits from auditing firms and from the U.S. Department of Labor. These audits also create additional expenses for the employer. It's important for employers to know if they can deduct the audit fees directly from the 401(k) plan.
Companies with a minimum of 100 employers must file Form 5500 annually with the Internal Revenue Service. Form 5500 reports information regarding the company’s benefit plans, and requires the company to include a copy of an audit report for the company’s 401(k) plan. The purpose of the annual audit is to ensure that the employer’s annual filing of Form 5500 fairly represents the value of the assets held in the plan. External auditors meet with the plan administrators, review plan documentation and form an opinion based on what they find.
The Department of Labor oversees the administration of 401(k) plans in businesses, and also performs audits of individual employee 401(k) plans. The Department of Labor reviews 401(k) plan documents and activities to ensure that the company remains in compliance with 401(k) reporting requirements.
While financial audits are required annually, Department of Labor audits are not. Several reasons exist to determine whether the Department of Labor will conduct an audit of a company’s 401(k) plan. These include employee complaints or random auditing. When the Department of Labor receives regular complaints regarding an employer’s 401(k) plan administration, it records those complaints. As the number of complaints continues to grow, the department can decide to audit that company’s plan. The department also conducts random audits, choosing different companies each year.
When undergoing an audit, the company incurs several expenses. With the annual audit, the company needs to pay the auditing firm for conducting the audit. The company also needs to pay current employees for create schedules and answer questions for the auditors throughout the process. With a Department of Labor audit, the company needs to pay current employees for their time assisting the auditors. These expenses represent ongoing and administrative expenses, which can be deducted from the 401(k) plan.
- 401k Help Center: DOL Audits of 401k Deposits
- United States Department of Labor: 401(k) Plans For Small Businesses
- United States Department of Labor: Selecting an Auditor for Your Employee Benefit Plan
- Securities and Exchange Commission. "SEC Implements Internal Control Provisions of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor." Accessed August 10, 2020.
- AICPA. "Generally Accepted Auditing Standards," Page 1599. Accessed August 10, 2020.
- Securities and Exchange Commission. "Public Company Accounting Oversight Board (PCAOB)." Accessed August 10, 2020.
- IAASB. "International Auditing and Assurance Standards Board." Accessed August 10, 2020.
- Internal Revenue Service. "IRS Audits." Accessed August 10, 2020.