Given the complexity of retirement plans, it’s not difficult for plan sponsors—whether new to the position, lacking formal training, or simply overwhelmed with all the responsibilities—to trip up.
That said, whatever the cause, administrative missteps can be extremely costly—running from fines to plan disqualification (which creates a taxable event for all participants)—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, with approximately half of employers with a minimum of 25,000 employees having experienced an audit during the same period. Respondents identify regulatory compliance as their third top concern (47%), following investment volatility (53%) and retirement benefit costs (49%).
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 PDQ is essential if penalties are to be avoided.
To that end, following is a list of the most commonly cited mistakes. 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Working with an outdated plan document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 are amply demonstrated by the recent spate of lawsuits explored in this Expert’s Corner post on the Retirement Playbook website.
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—which defines the processes a company has adopted to make investment-related decisions for its plan assets—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—trust documents, summary plan descriptions, written minutes, current vendor service agreements, investment performance reports, enrollment reports, participant educational material, procedural manuals and Form 5500—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.
Timely notification of plan contribution eligibility
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.
The IRS categorizes errors as significant and insignificant. Tami Guimelli, AVP and ERISA attorney with John Hancock Retirement Plan Services’ benefits consulting group, says the determination is “based on facts and circumstances—whether it is a one-time or recurring error, how many participants it affects, how much in plan assets is affected, and how long the error has existed.” Errors existing for two years or less may be considered insignificant and, as such may be fixed at any time; even if the plan is under audit. A significant error must be corrected no later than the end of the second plan year following the failure.
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) plans and establish good communication among all the parties—HR, payroll, plan adviser, record keeper, accountant, third-party administrator, providers and ERISA attorneys—responsible for the plan.
The following sources were used in this article: