Julie Killian

Many companies easily recognize the benefits of offering their employees a 401(k) plan. Too often, what companies do not recognize are the myriad of regulatory and compliance issues connected to maintaining a 401(k) plan – and it is not enough to have a reliable third-party administrator (“TPA”). Although a number of common deficiencies may be addressed by a competent TPA, it is ultimately the responsibility of the company sponsoring the 401(k) plan and the plan’s trustees to ensure compliance – and failure to comply may have legal and financial impacts. In short, a TPA is not enough and does not absolve the plan sponsor of its fiduciary and oversight responsibilities.

Common plan deficiencies include:

• Failure to adhere to the definition of compensation included in the plan document.
• Late remittances of employee elective deferrals.
• A plan document that lacks updates for recent changes in the law.
• Eligible employees not provided the opportunity to participate in the plan.
• Failure to file a correct or complete Form 5500.

Identifying and Avoiding Mistakes

The most effective ways to identify and avoid these mistakes are to:

• Carefully read the plan document and amendments.
• Have a third party conduct a review of the plan.
• Stay current with changes in laws, regulations, and filing requirements.

The plan document will detail key parameters, such as eligibility requirements, the types of pay included in compensation eligible for deferrals, and whether or not the plan allows participant loans, among other provisions. It is the “rule book” that describes how the plan should operate. If there is a difference between plan operations as described in the plan document and plan operations in practice, there is likely what is considered an operational deficiency.

Plan documents, especially those that have been amended several times, can be difficult to comprehend and interpret. Plan management may find it beneficial to employ a third party to review the plan, such as the third party administrator, an accounting firm, or ERISA counsel.

Fixing Mistakes

Both the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”) can and will enforce significant fees and penalties for plans with deficiencies. The worst mistake plan management can make is to ignore potential mistakes and hope the plan is not audited by a governmental agency. The IRS and DOL have self-reporting and self-correction programs that reward plans that proactively identify and correct mistakes and deficiencies, and the fees and penalties resulting from these programs are significantly less severe than those that are enforced when “caught.” These programs include the DOL’s Voluntary Fiduciary Correction Program (“VFCP”), Delinquent Filer Voluntary Compliance Program (“DFVCP”), and the IRS’s Voluntary Correction Program (“VCP”) and Self-Correction Program (“SCP”).

Example

Plans with more than 100 participants generally are required to file a Form 5500. Plans smaller than 100 participants file a Form 5500-SF or short form, which is substantially less intensive than the Form 5500. For example, a plan sponsor erroneously files a Form 5500-SF instead of a Form 5500. The plan is subject to DOL penalties of up to $1,100 per day that the Form 5500 is late, incomplete, or unfiled. In this case, after 45 days, the penalties have grown to $49,500. If the plan sponsor recognizes the issue before the DOL audits the return and files under the DVFP at the 45 day mark, the fee would be only $450, or $10 per day for a delinquent filing.

Conclusion

As shown, the worst-case scenario for fees and penalties can be easily avoided by the plan sponsor if they make it a priority to educate themselves regarding the plan document, legal and regulatory requirements, and the various self-correction programs offered by the IRS and DOL.

For more examples and tips for identifying, fixing, and avoiding these mistakes and more, see the Internal Revenue Service’s “401(k)Plan Fix-It Guide” available online at www.irs.gov.