BeachBum

As an auditor and, as other have alluded to, even if there is no balance there are still certain steps and check lists that need to be completed to comply with the auditing standards. Besides the standard set up of a new client, possible drafting of the financial statement as a nonattest service, drafting of AU-C 260 letter, potential drafting of AU-C 265 letter, drafting management representation letter, reviewing board minutes, all of the required inquiries, reviewing all of the plan documents, etc., I could also see there being some level of testing performed on participant data to ensure those that are eligible are properly included and those that are not included were properly excluded for not meeting the eligibility requirements. Have to remember that it isn't just the balance of assets in the plan that are tested as part of this type of an audit. Also keep in mind that an audit can't be issued without the auditor reviewing a draft of the 5500. Don't be surprised if the auditor also wants to see the previously filed 5500, which it sounds like they never even filed. Note that the items I listed are not all inclusive of the work that would need to be performed and are just an example of some of the items, not to mention the multiple layers of review that the audit likely needs to go through as well.

What is the plan's computation period for the safe harbor match? Plan year, pay period, month, quarter, etc.? If it is annually, then a true-up contribution would be needed from Company B for the $4,000 since the employee contributed more than 4% of their total plan compensation of $130,000. If it is per pay period, there would be no match as there were no employee deferrals made at Company B. If per month or quarter, there may be a true-up needed if the wages for both companies were paid in the same month or quarter. You may also need to consider if Company A is paying more match than they should if the calculation is based upon pay period, month, or quarter, and they did not contribute equally during each pay from Company A. For instance, if contributing 100% of wages up until they hit the maximum allowed during the year, then they may have had no contribution in the last couple pay periods at Company A as they would have been over the annual threshold of $19,500 in 2021 ($26,000 if they qualify for catch-up contributions).

The IRS Plan Fix-It Guide covers this topic: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-were-not-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees#:~:text=Generally%2C if you didn't,for the missed deferral opportunity.

Glad they are your client and not mine! @Nate Smentions amending the plan to be a 5% safe harbor match, but I believe you had to make that amendment by the last day of the following play year, which would have been December 31, 2021. I think you will run into issues even if you say the extra 1% is a discretionary match. Basically any participant who deferred less than 5% likely did not receive the 1%. Or at least not the full 1% if they deferred between 3% and 5%. Have to also consider if the discretionary match is based on a pay period or plan year. If plan year, you may have catchup contributions to consider as well. Not to mention the headache if a participant has left in the meantime and already rolled their funds out of the plan. May be worth talking to ERISA counsel on this one.

I am an auditor as well. The following link discusses defaulted loans which states "Whether due to a participant or an administrator error, a loan that goes into default is a deemed distribution of the entire unpaid loan balance plus accrued interest results." I think that makes it pretty clear that the 1099Rs that they issues are not correct as they did not include the accrued interest and would need to be corrected. https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-plan-loan-failures-and-deemed-distributions If there was not a distributable event, they should continue to track these loans and continue to accrue interest on them until such time that either the loan is repaid (not likely) or there is a distributable event. In the meantime, it causes a book to tax difference that should have a reconciliation in the footnotes to the financial statements. As such, you may have a bigger issue than just the fact that they did not include the interest in the 1099Rs.