The word “audit” generally has unpleasant connotations, but frankly, nonprofits should be used to the term by now! Most nonprofits work with independent auditing firms to ensure compliance with accounting and other rules, and third-party audits build trust with donors. Other audits may be conducted, for example, by the state employment commission to ensure compliance with workers’ compensation laws and payments. Each of these audits focuses on a different aspect of your business, and none of them indicate something is wrong – they are just part of doing business as a nonprofit organization.
There’s another type of audit you may not be as familiar with, especially if your organization is small: a 401K or retirement plan audit. The Department of Labor (DOL) requires organizations to file an annual Form 5500, which reports on the plan’s financial condition.
Plan sponsors with fewer than 120 employees participating in the program at the start of the year can file a short Form 5500 and generally do not require an audit. However, once your organization has 121 employees participating in the retirement plan at the start of the year, the longer form must be used, and this automatically triggers an audit.
Who Conducts the Audit and When Is It Due??
If your organization must conduct an audit, you are responsible for hiring an independent accountant or accounting firm to complete the retirement plan audit. Form 5500 is due on the last day of the seventh month of the plan year. The plan sponsor may file for an extension if necessary.
Who Participates in the Audit and What Do They Do?
Generally, the plan administrator or sponsor, recordkeeper, and custodian all participate. Each must provide all required records and answer questions. The investment advisor should also attend, as this professional’s guidance directly impacts the fund. Lastly, the auditor will, of course, lead the audit and work with all participants to gather and analyze the necessary plan records.
How Audits Unfold
A thorough audit can take several months, so it’s best to contact the independent accountant several months before the actual audit is due. The auditor provides a list of documents necessary for the audit, and the plan sponsor and other participants gather and send the documents to the auditor. The auditor then reviews the documents. They may have questions or need clarification on certain items. After they complete their review, they prepare financial statements and the final audit report.
Documents Needed
Many documents are needed to successfully complete a retirement plan audit. These include, but are not limited to:
- Current IRS letter
- All plan documents
- 401K administrative meeting minutes
- Rollover, distribution, and loan reports that detail transactions by participants
- Participant Account Summaries
- Statements of Net Assets Available for Benefits and Statement of Changes to Net Assets Available for Benefits
- Draft Form 5500
- IRC Compliance Testing Results
- An employee census with details of the plan participants
A second set of documents may be requested. This includes a sample of the employee participants and may require Form I-9, detailed payroll and reporting records or stubs, termination records, and requests for transactions.
Once the audit is complete, you will receive the report and documentation needed to complete your filing.
Audits, Just Part of Running a Nonprofit
Audits can require significant time and effort to gather the necessary documents, but they provide a valuable service. Not only will your audit report help ensure compliance with retirement plan requirements, but the detailed findings and report can be a valuable tool for improvement. With the right approach and planning, your retirement plan audit can go smoothly and will become just another annual milestone for your growing nonprofit.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
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