Given the complexity of 401(k) and 403(b) retirement plans, it’s not difficult for plan sponsors to trip up. Whatever the cause, missteps can be extremely costly—running from fines to plan disqualification—and government oversight is increasing.
The results of a 2016 Willis Towers Watson survey of 300 U.S. retirement plan sponsors reveal that during the last two years, one in three retirement plans has been audited by the Internal Revenue Service (IRS) or Department of Labor (DOL). The audit rate for larger employers is even higher.
The Employee Benefits Security Administration (EBSA), which is the DOL agency that enforces the Employee Retirement Income Security Act of 1974 (ERISA), is increasing pension plan audits, according to a September 2017 BenefitsPro article.
Whatever their assessment of the most common mistakes made by plan sponsors, those in the know agree that they are pervasive and correcting them is essential if penalties are to be avoided.
Following is a list of the most commonly cited mistakes, in one form or another, to 401(k) and 403(b) plans. Are you making any of these?
Not following the plan document correctly
Once a plan’s IRS-compliant provisions are set down in a plan document, the plan sponsor must ensure the plan is operated in accordance with those qualified plan provisions. The best way to avoid plan document mistakes: keep your plan design simple and follow it to the letter.
Working with an outdated plan document
Perform an annual review of your retirement plan document to be sure it’s in compliance with the most recent tax law requirements.
Not remitting payroll to the record keeper in a timely manner
Those looking for assistance should consider retaining a 3(16) fiduciary. As defined by ERISA, a 3(16) fiduciary acts as the plan administrator. The administrator is responsible for managing the day-to-day operations of the plan according to ERISA and the terms of the plan document.
Not benchmarking plan fees
The results of failing to do this this are amply demonstrated by the recent spate of lawsuits.
Not selecting a quality auditor
Go for an auditor highly experienced in the area of qualified plans. According to this EBSA assessment, the reports of auditors experienced with qualified plans contain fewer errors.
Not documenting the reason for changes
Document all decisions to ensure smooth transitions and guide future decisions.
Filing an inaccurate Form 5500
Most often this is the result of missing information.
Common participant-related errors
These include timely notification of plan contribution eligibility; failure to transmit contributions on time; improper employee exclusions; miscalculated compensation and company match; incorrect handling of auto enrollment, re-enrollment and auto-escalation.
Failure to pass the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests
Plan sponsors can avoid this mistake by using the correct definition of compensation and correctly identifying highly compensated employees (HCE).
Having an investment policy statement (IPS) that isn’t aligned with the plan document
While the law does not require a plan sponsor to have an IPS, it is considered to be possibly the single most important document a fiduciary creates, as it demonstrates the plan sponsor has an established set of guidelines for a prudent, fiduciary process. To ensure alignment with the plan document, only create an IPS after all other documents have been carefully reviewed. Once you’ve crafted the IPS, be sure to have it reviewed by legal counsel before implementation.
Allowing contributions that exceed the IRS’ limits on deferrals
Failure to correct this error can result in double taxation: taxes levied in the year the contributions were made and in the year they were distributed.
Allowing hardship withdrawals that fail to meet specifications
A hardship withdrawal is only allowed where there is an immediate and critical need, and only for the amount necessary to satisfy the need. Additionally, these withdrawals should be handled by the provider, not the plan sponsor. Loans must be repaid in a timely manner and cannot exceed $50,000.
Failure to complete a full audit
Plans with 120 participants or more must complete a full audit.
Failure to start required minimum distributions (RMD)
Plan sponsors must be on time for retirees and those who’ve reached age 70 1/2.
Failing to notify of plan contribution eligibility in a timely manner
To avoid missing timely notification, plan sponsors need to clearly understand their plan’s eligibility requirements and implement procedures to track eligibility. Plan sponsors failing to provide timely notification are required to make a qualified non-elective contribution (QNEC) to the participant’s account, a cost of 50% of the missed deferral.
Feeling a tad overwhelmed? Take heart, plan sponsors, your service providers can help you avoid mistakes!
Two keys to bear in mind: Hire a senior HR Director with experience overseeing 401(k) and 403(b) plans, and establish good communications among all the parties—HR, payroll, plan adviser, record keeper, accountant, third-party administrator, providers and ERISA attorneys responsible for the plan.