401k Check-Ups Can Prevent DOL and IRS Penalties
Many employee benefit plans receive their first audit upon meeting the level of 100 eligible participants. This is when federal law requires an audit of the plan. Unfortunately, however, many plans have deficiencies that go undetected until receiving their first audit. As the Department of Labor (DOL) continues to crack down on rules governing employee benefit plans, ensuring your plan is compliant with all applicable guidelines is becoming increasingly important prior to receiving your first audit.
The responsibility to be compliant with these rules and regulations, as well as ensuring you are operating within the requirements of your organization’s plan document and adoption agreement, falls on the individuals who have fiduciary responsibility, and applies to all plans irrespective of their size or audit requirement. A fiduciary who breaches his or her responsibilities, obligations or duties is personally liable to restore losses to the plan. Additionally, pervasive operational errors could result in the plan losing its tax-favorable status and/or the plan sponsor paying heavy penalties.
At Clayton & McKervey, our goal is to assist you in becoming compliant with the rules and regulations prior to receiving your first audit. Doing so may enable you to self-correct issues at a cost significantly less than what the Internal Revenue Service (IRS) could impose, and shows you are taking your fiduciary responsibility seriously. We offer consulting services for your 401(k) plan to help make sure you are not only compliant with all current regulations, but have the correct controls in place for future compliance. To begin assisting you, we have identified three key issues we have run into in first-year plan audits.
1. Eligibility Requirements
Requirements to entry vary from plan to plan and are typically based off of three measurable items:
- Age of employee
- Service to the employer
- Frequency of entry
The proper tracking of eligibility begins with accurately recording each participant’s demographic data, which is typically taken from Form I9. Ensuring I9s are filled out correctly and the data is properly transferred to the plan records is paramount to accurate employee record-keeping.
Many of the other issues identified were a result of not timely entering the participant into the plan based on the plan entry dates. If the frequency of entry is quarterly and the participant meets the age and service requirement early in the quarter, the participant should not be able to defer until the first payroll run in the following quarter. Granting an employee early participation can result in the funds of the participant being taxed and distributed. Alternatively, making sure the participant is enrolled on time, and not late, is another key area to consider. Even being one payroll late could result in the plan sponsor having to make up missed contributions to the employee’s account.
Improper calculation of eligible compensation is one of the most common issues found in employee benefit plans. Avoiding this error begins with truly understanding your plan’s definition of compensation. The plan document and adoption agreement specifically identify eligible compensation. Incorrectly excluding fringe benefits, bonuses (or separate deferral elections on bonuses), and certain other taxable items are some of the key issues found in compensation errors. Using an improper definition of compensation which results in incorrect employee deferrals, will likely result in a correction to the employee’s account made by the plan sponsor and, depending on the pervasiveness, could result in an operational error in the plan.
When employees’ monies are withheld from their paycheck to be remitted to the 401(k) plan, the plan sponsor has an obligation to get the money into the participant’s account as soon as administratively feasible. Often, employers overlook the importance of timely remittance of employee deferrals, which, by DOL standards, could be considered late. Establishing a pattern and internal guidelines whereby the plan sponsor consistently segregates and remits the funds is the best way to combat late remittances. If funds are remitted late, it could result in a prohibited transaction listed on the Form 5500 (which could trigger an IRS audit) and participants will need to be made whole on any lost earnings.
Clayton & McKervey has a specialized team dedicated to employee benefit plan services and the ever-changing regulations. The team is led by Julie Killian, Director of Assurance, who has more than 20 years experience auditing and consulting on employee benefit plans and vast knowledge of the IRS and DOL’s Employee Retirement Income Security Act of 1974 (ERISA). The employee benefit plan team receives extensive training to keep them updated on new developments, changing requirements and best practices. We strive to stay aware of the important changes in federal regulations governing retirement plan compliance and provide you with timely updates and recommendations. If your plan is growing and in need of an audit in coming years, reach out to our team to see if a check-up is right for you.