PSNC 2025: I Survived an Audit

If a retirement plan is selected by the Department of Labor or the IRS for an audit, it is important that fiduciaries do not panic. Instead, they should make sure they are equipped with the right documentation and procedures to ensure mistakes are fixed in a timely and efficient manner, according to experts at the PLANSPONSOR National Conference in Chicago.

Darbi Buchanan, director of 401(k) services at WorkSmart Systems Inc., emphasized during the session “I Survived an Audit” that it is important for plan sponsors to work closely with their third-party administrators and to be transparent with all parties involved when their plan is flagged for an audit.

“Make sure you let your financial adviser know, your TPA, your [internal] auditor, … your recordkeeper, and [tell] them you’re going to be reaching out to them to help you gather all the information and label it before you send it [to the auditor],” Buchanan said.

The panel’s moderator, Leah Sylvester, executive partner and president of retirement plans at Shepherd Financial, said the more willingness to cooperate that a plan sponsor shows a government auditor, the more it will work in their favor.

What Triggers an Audit?

Buchanan said an audit could be prompted by the industry a plan is in or even the type of plan that is offered. Because WorkSmart Systems is a multiple employer plan, Buchanan said she thought it was more likely to be audited.

Cassie Crist, a principal in Sikich, which provides audit and assurance services, said when she works with plan sponsor clients, she has noticed that if the sponsor has received a lot of participant complaints, it could be a red flag that attracts auditors. She said those complaints could be related to delayed withdrawals, missed contributions from payroll, receiving inappropriate benefits for which a participant is eligible, cybersecurity breaches or excessive fees.

“Take [participant complaints] seriously, because one person or a thousand people with those complaints can make an impact,” Crist said. “[That person] can easily reach out to an attorney and can reach out directly to the Department of Labor and raise a red flag.”

Crist said one of the most common triggers she sees is an untimely remittance. It can take only one instance of a mistake to trigger an audit, she said, and plan sponsors should be wary of any inconsistencies in their Form 5500, as well as late filings, as both are things the IRS is attuned to.

When a plan is selected for an audit, Buchanan recommended that the plan sponsor send the letter immediately to the TPA, which can go line by line through the letter and tell the sponsor which parties they need to contact to fulfill the auditor’s demands. The sponsor should also ask the auditor for timelines so that the sponsor does not need to complete everything at once, Buchanan said.

“When WorkSmart was selected, … the day we got the letter [was] April 8, 2020, and we had a deadline to provide certain things by the end of April, by the end of May, by the end of June, and by the end of July,” Buchanan said. “That made it so much easier and less overwhelming.”

Transparency Is Key

Crist added that in addition to informing the plan’s TPA and internal auditors, the plan sponsor should also inform its Employee Retirement Income Security Act counsel, as the attorney may need to be part of the correction process.

Crist emphasized that it is important for plan sponsors to ask questions of their independent auditors, so that the plan sponsor fully understands what to fix and what documentation to provide. She said the internal audit process can also be a learning experience for plan sponsors.

“I always tell my clients, especially in a first-year audit: ‘If you don’t understand what your auditor is asking or why they’re asking it, ask the question,’” Crist said. “It’s always important, because 95% of the time, those are going to be the exact same requests that are going to come up in an IRS or Department of Labor audit as well.”

When WorkSmart was audited, Buchanan said the biggest issue was with the plan’s fees and how they were being paid. The auditor found that expenses related to implementing new clients into the WorkSmart MEP were settlor fees and should not have been paid by the plan. She said a “hefty amount” was then paid back to the retirement plan, with lost earnings, and allocated to all the participants.

“That was a big learning lesson, and it ended up changing the processes of how we had our service providers bill WorkSmart,” Buchanan said. “We made sure they started sending separate bills, or at least identifying the difference between settlor and non-settlor, because the billing department or the accounting department that is actually going to be paying the bill—they don’t know the difference.”

When Buchanan worked as a TPA, she said she often had clients going through an audit sign a power of attorney so that the TPA could communicate on behalf of the plan sponsor.

“Sometimes those that are being audited have never been audited before, so you might talk a little too much to the auditor,” Buchanan explained. “You might say more than you really should be saying, so we [the TPA] would do our best to do all the talking for them [the plan sponsor].”

More information on how plan sponsors have dealt with audits can be found in coverage of last year’s PSNC session.