Often fiduciaries of retirement plans ask themselves the typical questions surrounding the operations of the plan: Are we selecting the best investment options for participants? How much are fees and will these expenses be paid by the employer or the plan? Are we utilizing the best and most cost-efficient platforms? Are we using the best service providers?
What is often not contemplated are the mistakes that can occur while administering the retirement plan. These errors can become very costly if not discovered and corrected through the appropriate channels promptly. The following list details some of the more common and expensive mistakes made by plan sponsors while operating a retirement plan.
Outdated Plan Documents
There have been recent changes to the Internal Revenue Code regarding retirement plan requirements, which has resulted in some relying on provisions included in old documents that do not reflect recent tax law changes. Failure to amend the plan timely in accordance with recent regulations can result in costly compliance fees.
To prevent this from occurring, perform an annual review of your retirement plan documents. Reach out to your plan advisor to ensure that your document is in compliance with recent changes in tax laws. Outside professionals draft standard prototype documents that are continually updated to remain in compliance with a changing environment. The benefits of using an outside plan advisor can significantly outweigh the cost.
If you missed a deadline to amend the plan for tax law changes, you might need to use the IRS correction program to bring it into compliance.
Operating the Plan Differently than Stated in the Plan Document
In order to be considered a qualified plan, the provision detailed in the document must satisfy the requirements of the Internal Revenue Code. Once the provisions are set, employers must establish practices and procedures to ensure the plan is operated in accordance with the plan document so that participants and beneficiaries receive their proper retirement benefits. In addition, failure to operate according to the document can result in additional fines and penalties.
For example, treatment of plan compensation by the plan sponsor may be different than defined in the document. Imagine Plan ABC defines compensation in the plan document as all wages to be included in employee’s W-2. However, the plan sponsor is excluding certain commissions from plan compensation when calculating employee contributions, and these commissions are considered to be wages reported on the W-2. The incorrect compensation has been used to calculate the employee contribution, which may also affect the calculation of the employer match. This results in an under-contribution to the participants’ accounts of the employee deferral and employer match. In this situation, the employer is required to make a corrective contribution, including earnings, for the participants affected. There may be additional fees through the IRS correction program.
To prevent this from occurring, review the most recent plan document to determine the types of compensation included in plan compensation and compare this to what actually is being used in payroll. Make sure you communicate with individuals calculating deferrals to ensure they are using the correct compensation.
Incorrectly Setting Up Newly Eligible Employees
It is important to understand the eligibility requirements as stated in the plan document to operate for the benefit of the employee and to avoid costly mistakes. The plan sponsor should notify employees when they are eligible to participate. Sometimes employees become eligible, and they are not notified timely of their eligibility to contribute. The plan sponsor is required to make a qualified non-elective contribution (QNEC) to the participant’s account for the missed deferral opportunity. The cost of this to the plan sponsor is 50% of the missed deferral.
For example, assume John is an employee of ABC company. He was hired on 6/15/15 and is eligible 9/01/15 based on requirements stated in the plan document. Due to an oversight error in the human resources department, he is not notified of his eligibility to contribute. John contacts his employer requesting to contribute to the plan, and he indicates that he was never notified of his eligibility. The employer is required to make a QNEC contribution equal to 50% of John’s missed deferral for the period beginning 9/1/15 through the date the plan sponsor began withholding contributions from his account.
To prevent this from occurring, review the plan document to ensure you have a good understanding of the eligibility requirements. Implement procedures to track employee information such as date of hire, birth date, eligibility date and other relevant information. Maintain documentation of the date notification was sent to newly eligible employees to satisfy recordkeeping requirements made by the Internal Revenue Code.
At MarksNelson, our commitment to helping our employee benefit plan clients begins with our dedication to audit quality. Our experience, commitment to training, and use of current technical guidelines helps your plan to be compliant with both the Department of Labor and IRS regulations. Additionally, we offer advice on improving and strengthening processes and compliance related issues.
For more information contact your MarksNelson professional.
About the author
Gerald Ostapko specializes in providing assurance services to clients in the retail, manufacturing, and distribution industries. He also helps his clients with their employee benefit plans.