For companies that offer their employees a 401(k) retirement plan, it is important to make sure that the plan is being operated properly.
List of questions on common errors found in retirement plan operations
Are the provisions of the plan document being applied appropriately in plan operations?
The plan document governs the operation of the plan. It is crucial to ensure the plan sponsor is following all of the provisions included in the plan document.
Is the correct definition of compensation used to determine how much employees can contribute?
There are many different definitions of compensation used in plan documents. Especially if you have changed payroll systems, payroll providers or amended your plan during the year, it is important to make sure your payroll system or payroll provider uses the correct definition of compensation when withholding contributions from your employees.
Are employer matching or profit-sharing contributions appropriately made and allocated?
One common error is caused by eligibility requirements for employees to participate in employer contributions. Reviewing length of service information and other eligibility provisions will help ensure that employer contributions are made properly and allocated to employees correctly.
Were all eligible employees identified and given the opportunity to contribute to a 401(k) account?
Generally, treat each employee who receives a W-2 form as an eligible employee unless you can properly exclude that employee under terms of the plan document. If a third party is responsible for employee enrollment, consider reviewing their procedures for making sure all newly eligible employees are being provided enrollment information annually.
Has the company promptly deposited employee contributions?
This continues to be a significant focus area for the Department of Labor. Small plans (less than 100 employees) have a seven-day safe harbor to deposit funds. Unfortunately, large plans do not fall under this safe harbor provision and should deposit funds as soon as administratively possible after each payroll period. Failure to do so could lead to the plan sponsor incurring fines and penalties.
Do loans to participants follow the plan document and meet IRS requirements?
Many 401(k) plans allow participants to borrow money from their accounts, and some plan documents provide varying limitations on the amounts and number of loans. Plan sponsors should review these limitations and make sure loans are handled properly.
Were hardship distributions made properly?
Some plans are permitted to make distributions to participants facing an immediate and heavy financial need, but there are a number of limitations on the amount that can be distributed and acceptable uses for the money. Plan sponsors should review applications for hardship withdrawals closely to ensure proper use of these funds.
You should consider consulting with your financial adviser or third-party administrator to assist you in reviewing this list and determining what options you might have to correct any errors you find.