Compliance Challenges Facing 401k Plan Sponsors

Managing a 401(k) plan can be a complex endeavor.

See also 401(K) Plan Audits

Since they are regulated by both the Department of Labor (DOL) and the Internal Revenue Service (IRS), there is no shortage of rules and regulations which must be followed. Plans with more than 100 total participants have the added challenge of undergoing an annual plan audit. The purpose of the audit is to ensure compliance with essential regulations and to verify proper plan accounting and transactions. This ensures properly handling of participants funds. During the audit many areas are examined including regulatory compliance, accounting processes and transaction timing and benchmarks. While most plans are well in compliance and face only minor issues, there are several that seem to experience the same issues. To help clients, prospects and others understand the issues, Hanson & Co, has provided a brief summary below.

Common Compliance Issues

  • Deferral Timing – It is the plan sponsor’s responsibility to ensure that allocated deferrals are made to employee accounts within a specific period of time. A company that is inconsistent with the transfer of deferrals risks attracting the attention of the IRS or the Department of Labor (DOL). Plan sponsors need to establish a consistent timeframe in which they make participants deferral deposits into retirement accounts. When reviewing plans the IRS and DOL look for patterns for how long it takes to deposit deferrals. If in one month it took the plan sponsor two (2) days to make the deposit, but suddenly it changes to one week, a compliance issue could arise. The key is to be as regulated and consistent as possible when executing participant deferrals. This will ensure deferrals are not considered late which could trigger a series of other undesirable issues.

  • Eligibility Requirements – Another common issue with 401k plans is the improper application of participant’s eligibility criteria. Plans have clear definition of which employees are eligible to participate and which are not. However, plan sponsors with multiple locations or affiliates often run into trouble in this area. Allowing employees to participate in the plan when they are not eligible can create serious issues. To resolve a situation where an employee who met eligibility requirements to participate but was not granted access can be time consuming. In this situation, the company is required to make up for missed contribution opportunities and to ensure lost earnings on the contributions is also repaid. Resolving these errors can be costly and time consuming.

  • Eligible Compensation – Plans have a clear definition of what eligible compensation deferrals should be applied against. Generally, all W-2 income qualifies but from time to time there is confusion about commission, bonuses and other one-time income. Plan sponsors need to ensure they carefully follow the plan guidelines even if an employee doesn’t their deferral percentage to apply to these income types. Unfortunately, if a plan sponsor doesn’t properly follow these rules the process for compliance can be costly. If deferrals were not made due to an error, the plan sponsor is responsible for making the deferral and compensating the participant on lost gains and others penalties.

Contact Us

There is no shortage of challenges facing 401k plan sponsors. Staying on top of plan issues and challenges can result in less compliance challenges and a smoother plan audit. If you have questions about plan issues or would like assistance with your plan audit, Hanson & Co is here to help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.