Avoiding 401(k) Plan Pitfalls
Imagine a scenario in which an employee comes to you with a question about his participation in the company 401(k) plan: He thought he was contributing 5% of his salary to the plan, and had been for the last six months, but his paycheck doesn’t show any deductions.
Did the company miss his deferrals? Or did he forget to turn in his enrollment form? Would you have the documentation on file to answer his question?
Proper administration of a 401(k) plan is important. In our audits of 401(k) plans, Copeland Buhl & Company PLLP has seen issues commonly arise in the areas outlined below. We have the experience and expertise to advise our clients on how to correct these issues in the short-term and mitigate them in the long-term.
- Timely remittance of employee contributions: An employee’s contribution of his or her wages to a 401(k) plan is expected to reach the plan within a reasonable amount of time. For a “small” plan, defined as a plan with fewer than 100 participants, the safe harbor rule is that contributions should be remitted (deposited) to the plan within 7 business days of the payroll check date. For a large plan (100 or more participants), there is no safe harbor rule, only the standard that employee contributions must be remitted as soon as they can be segregated from payroll. This varies depending on the size and payroll process of the employer, but delays considered unreasonable by the Department of Labor can lead to penalties.
- Employee enrollment eligibility: An employee must be given the option to enroll in the plan once he or she becomes eligible. The eligibility date is set out in the plan document, which must be followed. Eligibility must be communicated to an employee in a timely manner and the outcome of that communication – participation, or declining participation – should also be documented and kept on file.
- Documenting participant decisions: Documentation to support an employee’s request related to the plan must be kept by the employer. Good documentation shows that the plan is acting in the best interest of the employee participating should questions arise. This may include documenting an employee’s decision to change his or her contribution rate (for example, from 3% to 5%) or the decision to start participating or suspend participation in the plan. Documentation is especially important at organizations that automatically enroll employees in a retirement plan unless the employee specifically declines participation.
- Contributions and/or employer match calculation errors: Employee compensation and eligible 401(k) plan compensation are not always one and the same. Typical issues in this area often relate to whether bonuses are eligible compensation, and if so, whether plan contributions and match were included for bonuses. Again, the plan document is the authority on what is eligible and must be followed when calculating employee deferrals and the employer match.
Copeland Buhl & Company PLLP has encountered these issues in large plans, which are required by the Department of Labor to have an annual audit. However, they can affect plans of any size, including those that do not have an audit requirement. If a plan has any of these issues, the employer may be subject to penalties levied by the Department of Labor.
Copeland Buhl & Company PLLP has a team of CPAs with technical expertise in 401(k) plan administration. During our plan audits, we identify areas within the operation of the plan that can be improved and provide suggestions to correct issues as they arise. Contact us today for assistance with your 401(k) audit or 401(k) plan questions.