Audits of 401(k) Plans

Chapter 6 OTHER AUDITING CONSIDERATIONS

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

•     Identify the IRC requirements for qualified (tax-exempt) status.

•     Recognize representations from plan management.

•     Recall the components of Form 5500 and identify the supplemental schedules that are part of Form 5500 filing.

•     Recognize party in interest transactions and identify prohibited transactions.

•     Recall unique aspects of initial audits.

•     Identify provisions affecting employee benefit plans as they relate to Form 11-K filings with the SEC.

INTRODUCTION

A 401(k) plan must meet certain requirements to keep a qualified (tax-exempt) status. Although the auditor is not responsible for performing the tests that demonstrate the plan's compliance with these requirements, the auditor should perform procedures relative to the plan's tax status. Form 5500 is the annual report that summarizes certain data for each employee benefit plan to report that data to the respective governmental agencies.

Plan Tax Status

Generally, the financial statements of a 401(k) plan do not record any income tax liability or provision for income tax expense, as the plan should be designed and operated in accordance with the Internal Revenue Code (IRC) requirements to maintain its qualified, tax-exempt status. In the majority of plans, plan management requests a determination letter from the IRS saying that as of a certain date and point ...