As doubts have arisen regarding the sustainability of our nation’s social security system, more than ever, money is being poured into corporate-sponsored retirement plans. Retirement plans are an effective way for businesses and their owners to reduce taxable income, and in today’s competitive labor market, they are one of many requirements in attracting and recruiting top talent.
In the 30-plus years that we have been involved in retirement plan compliance, we have seen the great benefits that retirement plans can provide our clients, as well as their most valuable assets—their employees. When not properly administered, however, retirement plans can cause significant headaches and can lead to significant penalties imposed by the DOL and the IRS.
I recently had a conversation with a business owner who was preparing for retirement. He had sold a significant portion of his company and was hoping to soon enjoy his time sitting on the beach, when he received an unfortunate letter from the DOL indicating that he hadn’t appropriately filed the plan’s Form 5500 for the previous three years. We were able to help him through the process and eventually he was able to meet all of the DOL’s requests, but not without some frustration and additional cost on his part. At one point, he expressed that he regretted setting up the plan in the first place. This in large part was due to the fact that the plan had been neglected and this eventually came back to haunt him.
In our audits over the years, we have come across numerous plan deficiencies and I have identified three of the most common:
1. The plan administrator fails to apply the correct definition of compensation.
All too often, the company improperly calculates participant deferrals and employer matching contributions by incorrectly identifying eligible compensation. The company’s plan document defines which compensation should be considered and/or excluded in calculating participant deferrals. For example, not deferring a portion of a participant’s bonus, when bonuses are included in eligible compensation as defined by the plan document, will result in a plan operational error. The company will be liable for a portion of the participant’s missed deferrals, as well as associated missed earnings on the deferrals.
2. Late deferral remittances.
Over the last several years, the Department of Labor has focused its efforts on identifying plan sponsors who are holding employee deferral contributions for an excessive period before remitting them to the plan custodian. For small plans (typically plans with fewer than 100 participants), there is an established safe harbor of 7 days. For large plans, however, these funds should be remitted to the custodian as soon as they are separately identifiable following the pay date. Holding these funds beyond this time is considered a prohibited transaction under ERISA. The DOL is willing to assist companies to take action in correcting issues related to this, however, failure to do so could result in the plan losing its tax qualification status.
3. Participant eligibility issues.
The company’s plan document defines which employees are eligible to participate in the plan. Often, plan administrators are not familiar enough with the plan document to ensure that employees who are eligible are given the opportunity to enroll in the plan in a timely manner. Additionally, there are times when employees are enrolled in the plan before becoming eligible. These mistakes constitute plan operational errors that can be costly to rectify.
You may have service providers in place to help with the various aspects of retirement plan administration, but remember, the responsibility ultimately falls upon management to ensure that the plan is operating in accordance with the plan document as well as IRS and DOL regulations.