Offering a 401(k) to your employees is a wonderful benefit. It doesn’t have to be expensive and can often be highly automated. It also strengthens your business by attracting and retaining high-quality employees and can help secure your own retirement. When offering a 401(k) plan, there are a few tips to keep in mind so that you can save too - save your time and money by avoiding costly errors. Looking back on this past 5500 filing season, here are some common pitfalls we saw and tips on how you can avoid them.

Deferrals on Ineligible Compensation

Common issues tend to arise relating to the application of a plan document’s definition of compensation. For example, whether to include or exclude fringe benefits such as a mileage or phone allowance as compensation eligible for deferrals.

How to avoid this error: We recommend that plan sponsors carefully review their plan document’s definition of eligible compensation. The payroll system codes should also be carefully reviewed to ensure that each pay line item is properly included or excluded, consistent with the plan document’s definition of eligible compensation.

Inconsistent or Late Remittances of Employee Contributions

The Department of Labor (DOL) has demonstrated, in recent audits, its intent to closely monitor remittances of employee contributions. The DOL Regulation 2510.3-102 requires employers to remit employee contributions “as soon as they can be reasonably 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 the amounts were withheld from wages. Accordingly, increased oversight by regulators in this area has shown little tolerance for untimely remittances.

How to avoid this error: To avoid prohibited transaction filings or regulatory non-compliance issues, we recommend documenting the procedures to remit 401(k) contributions to your plan. These procedures should ensure that contributions are remitted consistently as soon as reasonably possible from the date of the payroll. Reviewing the remittances dates should be part of your plan’s regular monitoring procedures as well. We further recommend training a backup individual on the procedures in order to perform the remittance should the regular employee be unavailable.

Salary or Deferral Changes Without Support

Another common issue we encountered was missing documentation. Documentation supporting all changes should be maintained as evidence of the appropriate authorization. Maintaining proper documentation relating to participant data can safeguard the plan and plan sponsor. Transactions construed as a breach of fiduciary duty could result in penalties or be considered prohibited transactions, or both.

How to avoid this error: As a preventative step to avoid this pitfall, we recommend that deferral changes not be processed until you have received the proper documentation.

As always, we would be happy to schedule a meeting or a call to go over any of these items in more detail.

— Molly Mayer, Staff Accountant & Lisa Holfeld, CPA, Manager

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Simply send us an email ShannonTax@Shannon-CPAs.com or contact our office at 253-852-8500 to indicate your interest in getting set up.

With an estimated U.S. divorce rate in the 40% to 50% range, your retirement plan is likely to receive a domestic relations order. These orders entitle an “alternate payee” to a portion of your participant’s retirement benefits. However, it’s up to the plan sponsor or administrator to determine whether the order is qualified, making it a qualified domestic relations order (QDRO). Even though it’s issued by a government entity, it must comply with your plan’s terms.

Spotting Common Errors

Here are some common reasons plan sponsors will fail to qualify a
domestic relations order:

Inappropriate form of requested payment. This could occur, for example, if you have a defined benefit plan that doesn’t allow for lump-sum distributions, but the order calls for one.

Distribution timing request. The order might request an immediate distribution, but your plan allows them to occur only when the participant reaches retirement age.

Valuation timing issues. Suppose your defined contribution plan allows for the valuation of a participant’s vested benefits only on a quarterly basis. If the order calls for an immediate valuation of benefits so that a stipulated proportion (for example, 50%) of assets ultimately can be distributed to the alternate payee, you can reject the order.

Fluctuations in asset values. If the order doesn’t address an increase or decrease in the value of plan assets between the order’s date and the date of distribution, this could lead to subsequent confusion and disputes.

Addressing the prospect of premature death of an alternate payee. Your plan document might require that the order specify the implications of the death of an alternate payee before paying the retirement benefit. Thus, to be qualified, an order might, for example, stipulate that the benefit be payable to the deceased alternate payee’s estate.

Sloppily drafted domestic relations orders occasionally don’t identify your retirement plan correctly, such as by naming the custodian instead of the plan by its legal name. While an easy fix, the correction would need to be made before qualifying the order.

Handling Rejection

If and when a domestic relations order is incompatible with your plan’s terms, the rules governing how to reject it are specific. ERISA’s rules are intended to give the alternate payee a reasonable opportunity to correct the errors. You must send notice of the rejection to the alternate payee (or payees) and the plan participant.

The notice must spell out:

• Your (or your administrator’s) reasons for rejecting the domestic relations order,
• Which specific plan provisions the order is incompatible with,
• Any deadlines your plan requires the order to satisfy, and
• Any missing information the order needs to have to qualify. 

In general, ERISA requires that you be helpful in resolving any domestic relations order qualification issues. This includes using plain language so that your instructions are easily understood by everyone.

Getting it Right

Remember, a rejection isn’t necessarily final; whoever drafted the domestic relations order language will redraft it and submit it again, seeking qualification from the plan. Be sure to follow your plan document each time a domestic relations order is submitted. The Department of Labor has helpful information addressing the QDRO rules at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center

The IRS has announced that some retirement benefit plan limitations will be adjusted for 2018. Above are selected limitation amounts.