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