Retirement plans have become a fixture at most companies because they provide employees with an opportunity to save for their future.
While there are many types of retirement plans available, most companies elect to offer a 401k plan. This plan type is quite popular because it allows employees to invest pre-tax dollars to fund their retirement. In addition, many companies offer an employer match program designed to incentivize employee participation. While these plans offer significant benefits to participants they can also be challenging for plan sponsors to manage. There are a myriad of rules and regulations from both the Internal Revenue Service (IRS) and Department of Labor (DOL) to regulate these plans including deferrals, reporting and several other areas. It’s no surprise that from time to time mistakes are made that can make a plan non-compliant. To help clients, prospects and others understand these mistakes and how to correct them, Hanson & Co has provided a summary below.
Resolving Common Plan Errors
The Plan Doesn’t Operate According to Plan Document – According to the IRS this is one of the most common mistakes that a plan sponsor makes. Once you become aware this is happening with your plan it’s essential to conduct a review of the plan document provisions and compare it against plan operations. This will identify areas where changes need to be made to maintain compliance. Fix the mistake by making reasonable corrections that place impacted participants in the same position they would be if the error didn’t occur. We advise clients that it’s wise to conduct an annual review to ensure plan operations match plan documents.
Employer Matching Errors – It’s common for a plan sponsor to not use the plan definition of compensation for all deferrals and allocations. Remember that most plans define compensation as wages and salaries, fees for professional services, commission, tips, fringe benefits and bonuses. If this mistake has happened, it’s important to review the plan’s definition of compensation used for determining elective deferrals, matching contributions, etc. Once an issue has been identified, make a corrective contribution, reallocation or distribution to resolve the issue. A best practice to prevent such issues is to regularly review compensation definitions to ensure they are properly followed.
Plan Failed Nondiscrimination Tests – This happens when contributions made to highly compensated employees (HCE) are not proportionate to non-highly compensated employees (NCHE). If this happens with your plan, the first step is to review employee classification to ensure employees are properly classified as HCE or NHCE. If the classification is correct and the test failure stands, then correct the problem by making qualified non-elective contributions to NCHE. This will eliminate the discrimination and bring the plan back into compliance.
Non-timely Deposit of Deferrals – This occurs when the plan sponsor takes longer than is permitted to deposit employee deferrals into the plan trust. If this occurs with your plan, determine the earliest date that deferrals can be segregated from general assets. Compare that date with the actual deposit dates to determine the tardiness of deposits. This error is generally fixed by depositing all elective deferrals withheld and related earnings into the plan’s trust. In addition, plan sponsors generally need to participate in the DOL Voluntary Fiduciary Correction Program to resolve the issue. This problem can be avoided by conducting regular reviews of the timing of deferral deposits to ensure they follow plan documents.
It’s clear there are many situations which can lead to non-compliance for plan administrators. The good news is that the IRS and DOL have many programs designed to make it easy to resolve errors and come back into compliance. If you believe your plan has an error or would like assistance with your 401k plan audit, Hanson & Co can help. For additional information contact us here.