An employer-sponsored retirement plan is a smart way for companies to attract top talent and for employees to save for retirement. Correctly maintaining the plan is key to compliance. However, mistakes can happen. Working with a third-party administrator (TPA) Compliance consulting firm like Intac/Future Plan can help plan sponsors circumvent these seven common mistakes in qualified retirement plan administration.

Error #1: Late Contributions to the Plan

Employee deferrals and loan repayments must be deposited as soon as reasonably possible for a large plan. This is generally assumed to be around the same time as payroll taxes are submitted to the IRS or by the seventh business day for plans covering less than 100 participants.

• Contributions deposited after the deadline may require corrections that include additional contributions to make participants whole for lost earnings, notices to participants, or additional government filings.
• Late participant deferrals must also be disclosed when the Form 5500 is filed.

Employer contributions (Matching / Profit Sharing) must be contributed no later than the due date of the company’s tax return including the extended due date.

Tip:

Make sure you know who is submitting contributions to the retirement plan and establish processes and procedures to ensure contributions are deposited in accordance with the required timing standards; it may be an individual or directly from the business’s payroll provider. Have a backup process in place when individuals are on vacation.

Error #2: Incorrect Compensation Calculations

What is the definition of compensation used for retirement plan purposes? If the sponsor’s payroll company is helping calculate employer contributions, it’s important to use the proper definition found in the plan document.

• Some plans may exclude certain types of compensation, such as bonuses, commissions, overtime, or fringe benefits and reimbursements.
• If incorrect types of compensation are included/excluded, this type of failure can result in participants receiving a contribution allocation that is greater than/less than the amount they should have received.

Tip:

Know your definition of compensation and work with the payroll provider to ensure the correct compensation is being used. Be sure to spot check these calculations from time to time as not all compensation items happen every payroll period.

Error #3: Participant Eligibility Oversights

Who is eligible to participate in the plan and when do they begin participation? Mistakes often occur in a controlled group situation after a merger or acquisition, when otherwise eligible employees are excluded and do not receive an allocation of contributions to which they are entitled. Alternatively, ineligible employees may be mistakenly included in the plan and the employer has made additional contributions which it did not need to make.

Tip:

Check the plan document to see how the plan defines eligibility as there may be different eligibility criteria for employee contributions and employer contributions. Your recordkeeper may also be helpful if you provide them with full payroll data each pay period. Be sure to include your TPA if you have any questions, especially during an acquisition or merger to make sure the acquired employees are properly handled.

 Error #4: Taking or Making Impermissible Distributions

When can a participant take a distribution? Are they required to take a distribution? Distributions are very limited while a participant is still working. There are also specific timing rules for participant distributions after a separation of service, termination of employment, becoming disabled, and reaching normal retirement age.

Tip:

Understand what the plan document and the law allows or requires. It’s important that these are monitored, and that knowledgeable personnel are involved in the distribution approval process.

Error #5: Mismanaged Loans From the Plan

Did you fail to withhold loan payments or reach out to service providers when an employee with a loan went on a leave of absence? Was the loan allowed for a longer period of time than allowed in the plan document? When repayments are not completed in a timely fashion, the loan may be considered in default and the participant is then taxed on the loan in the year of the default. Also, most plans limit plan loans to five years for all purposes.

Tip:

Follow the written procedures, especially regarding repayment terms, interest rates, repayment lengths, the maximum number of loans, and the terms and processes for taking loans. Reach out to service providers immediately if you have questions on when loan payments should be started and how to handle leaves.

Error #6: Failure to Perform and Pass Compliance Testing

All 401(k) plans must perform certain tests each year to prove compliance with IRS regulations. The following are the two tests with the most errors:

• ADP/ACP Testing

Designed to ensure that highly compensated employees do not benefit more in the 401(k) plan than the non-highly compensated employees in the amounts of deferrals that they make to the plan or the amounts of matching/after-tax contributions.

Failure of the ADP and/or the ACP tests require either refunds to the highly compensated employees or corrective contributions to the non-highly compensated employees. These corrective actions have specific deadline dates for completion.

• Top-Heavy Testing

The law requires that if the account balances of key employees comprise 60% or more of plan assets, non-key employees are entitled to receive a minimum benefit or contribution from the employer (generally 3% of compensation for a 401(k) plan). This top-heavy minimum must be deposited by the last day of the next plan year.

Tip:

Ensure the TPA is completing mandatory plan testing on a timely basis or consider adopting certain plan designs that provide contribution or testing exemptions for these tests.

Error # 7: Failure to File Form 5500

The Form 5500 (and Form 8955-SSA, if due) and required attachments are due seven months after the end of the plan year unless an extension to file the Form 5500 is requested. The extension request is automatic and provides an additional 2½ months to your completion date. Large plan filers (those with more than 100 participants with account balances) must also schedule a mandatory CPA audit to be completed in time to be included with the Form 5500 filing.

Tip:

Be sure to understand the filing requirements, document who files the form, and confirm completion each year.

Bottom line—with periodic self-audits and continual monitoring, mistakes in retirement plan administration can be avoided. Yet when they do occur, voluntary self-correction is critical. The IRS and DOJ have policies and procedures in place for corrections. If you have questions or think you may have an error regarding your qualified retirement plan, don’t hesitate to contact your Intac FuturePlan consultant for guidance.