Retirement plans can be challenging to administer. Most businesses rely so heavily on outside consultants and third-party administrators to create and maintain their plans that they often don’t have resources in-house who fully appreciate the complex interaction of benefit calculations, payment schedules, and filing deadlines. This article is intended to provide you with a brief explanation of some of the most common mistakes made by plan sponsors and an introduction to resources that can help you identify and correct retirement plan errors.
Common mistakes made by plan sponsors
Some of the most frequent mistakes include:
- Delinquent contributions. One of the most common errors that plan sponsors make and the area with high scrutiny by the Department of Labor (DOL) relates to delinquent deposit of amounts withheld from employee pay (i.e., 401(k) plan contributions and loan repayments). The DOL has strict rules that require employers to deposit amounts soon after they are withheld — in many cases within one to two days. Late deposits can range anywhere from one-time errors due to a clerical mistake or misunderstanding to a systemic problem that arises from a failure to understand the deposit requirements. This error is frequently identified during the annual plan audit when outside auditors test a sample of deposits for timeliness and accuracy.
- Operational failures. Retirement plans are governed by plan documents that are usually fairly complex and may change over time. These documents must satisfy the requirements of the Internal Revenue Code and plan sponsors are required to follow the plan provisions. In some instances, a plan sponsor may fail to properly administer the plan terms. One common mistake is a failure to understand how the plan defines “compensation.” Once a sponsor incorrectly excludes or includes any component of compensation in practice, a cascade of errors results. Suddenly, all of the employee deferrals, employer match, and nonelective contributions that are based on the participant’s compensation are being calculated incorrectly.
- Prohibited transactions. Once a plan sponsor contributes money to a benefit plan, that money becomes a plan asset, and the rules are very strict on whether it can be removed from the plan. The plan sponsor is prohibited from using plan assets for its own benefit. A typical mistake in this area is an attempt to correct an erroneous employer deposit. Once a contribution is made, there’s a very specific administrative process for removing any inadvertent excess amounts, and it only applies in limited circumstances. When it comes to errors such as these, the answer is often that the sponsor must leave the money in the plan. Another area where sponsors are prone to mistakes is the reimbursement of plan expenses. The rules do permit sponsors to pay plan expenses out of their general assets and then seek reimbursement from the plan. Failure to do so in a timely manner, however, can result in the treatment of the transaction as a loan from the sponsor to the plan, which is generally prohibited.
- Missed filings. While third-party administrators have become more effective in making sure that the Form 5500 Annual Return/Report of Employee Benefit Plan gets filed on time for most retirement plans, the problem can still arise from time to time, particularly if there’s significant turnover with those responsible for signing the filing or when a merger or acquisition results in a sponsor overseeing plans of which some within the organization are unaware. The missed filing issue for retirement plans is similar to the problems we covered in a recent article about benefit plans in general.
Correcting retirement plan errors
The good news for employers who find mistakes related to their retirement plan is that the Internal Revenue Service (IRS) and DOL both have correction programs available. Depending on the error and the underlying issues, as well as available in-house resources, it might make sense to seek outside support. Some corrections can be labor-intensive and involve filings and applications with the IRS and DOL while other corrections may be able to be self-corrected.
Is it time for a benefit plan compliance review?
If you’re wondering whether your employee benefits plan management has been fully compliant with all of the rules that govern retirement plans, a benefit compliance review could be the answer. This review serves as a kind of mock audit. Consultants meet with everyone in your business who has a role in benefit plan administration, including payroll, HR, and finance. They review plan documents ahead of time, so that they know what answers these individuals should be providing to the questions being asked. The consultants interview the key stakeholders who have hands-on responsibilities for the plan to understand their day-to-day interactions with the plan. The review also includes an examination of a significant sample of transactions that have the most room for error — such as timeliness of contributions, distributions, etc.
A compliance review can identify potential problems with the plan and help to resolve issues before the plan is audited by the IRS or DOL. It can be particularly helpful for employers who have experienced significant turnover in the personnel that manage benefits and for businesses that have seen significant increases in their number of employees participating in the plan.
If you have questions or concerns about your company’s retirement plans, please contact a Plante Moran employee benefits consultant.
