It’s the time of year for sponsors of 401k plans (and other types of ERISA qualified plans) to begin your annual review for compliance and reporting.
If you don’t have a scheduled, repeatable process, be a little nervous…and take steps to implement one. You’re not alone—there are firms to guide you with plan compliance issues as well as firms to ensure your participants’ funds are properly invested.
These firms can help you solve and prevent any problems with positive intention rather than wondering and worrying.
I’ll lay out the most common 5 mistakes in this article and follow up with the rest of the “Big 10” in a 2nd article.
Number 1 – Lack of ERISA Fidelity Bond
A fidelity bond is a stone cold requirement. Smaller companies, even those with retirement plan experience, forget to have a large enough bond for their plan—or to have one altogether.
The bond must cover anyone who handles plan funds and the bond must be at least 10% of plan assets, so ss your plan grows, you must update your bond.
Bond minimum is $1,000 and maximum is $500,000. If employer stock is included, that maximum is bond is $1,000,000
Number 2 – Failure to update document or unsigned document, or just plain lost document
Why not locate your plan document right now? Do you know where it is? Does someone else? Is it signed? You want to discover this for yourself rather than having IRS or DOL request it and be forced to try to wriggle off the hook!
Number 3 – Failure to follow the terms of the plan document
The plan document is a very serious thing. These documents can be lengthy and detailed and following them takes positive effort by the team.
The plan represents the future of your employees in retirement—at least partially. As such, there isn’t much tolerance for failing to follow the terms of the document.
A leading cause for this problem is…
Number 4 – Mistakes with employee eligibility
Plans often allow employees into the plan prematurely. There are a few universal minimum guidelines for employee eligibility such as:
- Age 21
- At least one year of service
There are requirements for vesting periods and contribution limits as well.
Worse than allowing employees into the plan early…letting them in too late! This is bad; a plan sponsor will be forced to make this right which is much more difficult than remaining in compliance.
Number 5 – Employee deferrals late or completely missing
Department of Labor requires the plan sponsor to deposit employee contributions no later than the 15th of the following month when they’re due. It’s not such a big problem if one deposit is missed.
However, these problems rarely happen in isolation. If one deposit is missed, it probably means there are more problems to find.
Number 6 – Incorrect Application of Loan Provisions
We’re getting more into the weeds with this one. A plan may or may not allow loans and that decision is reflected in the Plan Document.
We’ve seen companies approve and fund 401(k) participant loans when there was specific language against it in the Plan Document! Qualified retirement plans require much attention to every detail, which is why companies outsource compliance issues to firms that specialize in it.
Number 7 – Incorrect Hardship Withdrawals
There are two requirements to allow hardship withdrawals from a retirement plan. First, there must be a demonstrated immediate and heavy financial need. Second, the plan must demonstrate that a distribution from the plan is necessary to address the need.
DOL and IRS want to make sure that 401K money stays put except in emergencies. A typical company or professional practice is usually not aware of its burden to justify an approved hardship withdrawal
Number 8 – Failure to File Form 5500
This is the main retirement plan reporting form for the IRS and DOL. It is required to be filed annually. Not surprisingly, companies forget all the time. Partnering with a professional administrator firm solves this problem for good.
Number 9 – Uncorrected Testing Failures
Retirement plans can be complex beasts. Well worth it, but complex. 401K plans in particular have two main annual nondiscrimination tests: Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP).
I bet not many of you are going to run to Google to learn about these right now! These are the key tests to make sure the owners and executives aren’t getting an unfair/unlawful portion of the benefits of the 401K.
And these fairly complicated and involved tests are a key motivator to implement a Safe Harbor plan. Safe Harbor plans avoid annual ACP and ADP testing. Safe Harbor plans require some combination of a minimum employer contribution and/or automatic enrollment (with opt-out option) of all eligible participants.
Professional practices—particularly medical and legal—often want to implement a plan that maximizes owner and executive benefits (without breaking the rules, of course). These type of groups may need to engage in annual ACP/ADP testing—where an Administration firm would probably be vital to keep things compliant.
Number 10 – Failure to Send Required Notices to Participants
Retirement plans are only serve Participants if they’re aware of them and understand at least the basics of the plan. To this end, there are significant communication requirements for all plans. (At least) annual notifications to participants are very important, and those communications are required to meet guidelines for content and transparency.
Companies can get into real trouble if Participants are out of the loop for too long. This requirement is handled by an Administration/Recordkeeping firm for many small businesses once the plan (and sponsor responsibilities) get a certain size.
Any questions? Feel free to check out our Contacts page and reach out! We can systematically work through your plan, identify compliance issues, identify plan design opportunities for ownership, and make sure all comms are (automatically) sent to participants, trustees, and executives.
