How to avoid common 401(k) plan errors

Matt Prunier, Audit Principal
August 2015

This article was originally published in Mainebiz.

There’s no denying that 401(k) retirement plans are a popular and valued benefit for employees. From an employer’s perspective, they’re great, too: properly run and managed 401(k) plans don’t require a significant investment of time or money, making them a win-win.

However, there is a catch. Retirement plans are regulated by both the U.S. Department of Labor and the Internal Revenue Service, meaning a laundry list of rules and regulations. Running afoul of these rules has serious consequences, including monetary fines, penalties, or even loss of the plan’s qualified tax status. As a firm, we audit close to 200 plans each year and have seen it all. Following are the most common errors we have run into.

Not following the plan document

The plan document is the legal instrument that dictates how your plan should be run. It is the first and last word on how your plan should be operating on a daily basis. As auditors we often run into situations where the plan is being operated (almost always unintentionally) in a manner which is inconsistent with how the plan document is written. The answer we often hear is, “That is the way we have always done it.”

Failure to follow the definition of eligible compensation

Somewhere in your document there is a section that describes which wages will be considered compensation for purposes of calculating employee deferrals and employer match amounts. Many plans simply define compensation as W-2 wages. This seems simple, but in practice the application of these rules can be much more difficult. What happens to the group term life which is imputed income on a pay stub, or to the $50 gift card you gave your employees around the holidays? What to do: Read your plan document to understand the definition of compensation then verify that this is and how everything is actually working.

Fiduciary responsibilities — who me?

Almost all the employers we work with look to outside service providers to manage their plans. Investment advisors help select and monitor funds, third party administrators track participant accounts and handle many of the everyday transactions of the plan like loans and distributions and custodians hold the assets for the plan. But who is in charge of monitoring the various service providers? Legally, the plan sponsor and the plan administrator hold fiduciary responsibilities for the plans they administer. When something goes wrong, the Department of Labor and the IRS will be looking to the company for answers. What to do: Set up a plan committee responsible for approving plan amendments, reviewing plan fees and expenses, monitoring the performance of plan investments and generally monitoring the operations of the plan. Ensure they meet regularly and maintain detailed minutes.

Untimely remittance to the plan

The general rule of the Department of Labor states that employee deferrals must be remitted to the plan as of the earliest date on which these contributions can reasonably be segregated from the employer’s general assets but in no event later than the 15th business day following the end of the month in which amounts are contributed by employees and withheld from their wages. The DOL has increased scrutiny of the timeliness of remittance of employee contributions and is enforcing the “earliest date” requirement of the regulations.

This has gone so far as instances where we have seen contributions remitted four days after a particular pay date for 25 pay periods during a year and then on the 26th period the funds were remitted on Day 1 and the DOL calls all of the four-day remittances late since the plan has demonstrated the ability to remit funds before that timeframe.

What to do: Be diligent and consider having a backup

This is by no means an exhaustive list of potential pitfalls. Working together with your advisors and providers can help ensure your plan stays out of trouble with the regulators.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.