5 Pitfalls to Administering a Compliant Retirement Plan

When I began consulting, I always knew I would be helping companies solve HR problems.  In fact, that was the reason I was there! What has surprised me the most is the number of retirement plan account problems I have encountered throughout my time with Helios.

Administration of retirement plans is a complex task and can be handled well with the right support and tools in place. I thought I would share some of my experiences so others can hopefully avoid finding themselves in the same place as those responsible, yet non-compliant companies.

Compliance issues with administering a retirement plan can be detrimental to the plan itself. The IRS can determine that a company is not fiscally responsible enough to administer the program properly and therefore may withdraw the company's ability to administer a plan. There are also fines associated with poorly administered plans.

What’s the takeaway? 

Be compliant, administer your plan according to the plan documents and ensure you are taking care of your employees.

(And might I add, as a consultant, I am writing this blog from the perspective of having encountered problems with account administration. This it is not to be considered a substitute for legal assistance when administering your plan.)

Top 5 Pitfalls to Administering a Compliant Retirement Plan

#1. Ensure employees are aware. Mandatory compliance notifications, such as changes to investment funds, fees notifications and quarterly statements are critical, most of which are handled by the third party administrator who holds the funds for the plan. Other notifications include:

1. Notifying employees who are reaching 50 years of age in the year they are eligible for catch-up contributions, if applicable. Catch-up contributions are an additional pre-taxed amount an employee may contribute to their plan.
2. Notifying employees of auto-enrollment and auto-increases (see below for more information) shows the employer’s good faith to ensure employees can take full advantage of the plan.

#2. Enrolling employees on time. The IRS states a company responsible for administering a plan must ensure employees are enrolled on time. One important step to consider is checking your plan documents to ensure you are fully aware of what the plan’s enrollment requirements are.

1. Auto-enrollment is a process in which employees are automatically enrolled into the plan when they reach eligibility, without the need for the employee to complete any documentation. A best practice is to ensure you notify the employee and have him/her sign a document during the new hire process which states the employee is aware of the auto-enrollment, and he/she will be enrolled unless they take the necessary steps to drop out of the program.
2. Many companies allow employees to enroll very soon after they are hired, which can make for an administrative nightmare if you are relying on technology to take care of the auto-enrollment (file feeds for example to the 401(k) provider to initiate the auto-enrollment) and not monitoring the process to ensure everything is working correctly.

#3. Auto increases/Step up plans. Some plans hold a provision that will auto escalate the deferral percentage employees are contributing to the plan.  Usually, this takes place at a given time period such as on their work anniversary date or on a standard date that permits everyone to escalate at the same time. The plan documents will provide the details about the auto escalation to help you ensure compliance.   Correction for these types of errors is the same for failure to enroll employees on time.

#4. Complete required testing on time. Testing is required for a variety of different plans. Please check with your plan administrator to ensure you are aware of the testing requirements. Helios recommends doing testing mid-year to ensure the highly compensated employees are not over deferring and may have to receive a refund if the plan does not pass the required annual testing.

#5. Sending employee contributions into the plan on time. Efficient and compliant plan administration means depositing the deferral funds and matching contributions into the plan timely.  There are many thoughts on what is considered “timely”.  Essentially, auditors are looking for consistency, and usually no more than seven (7) days between payroll and depositing of the funds.  Once the time it takes to make the deposit is established, it should remain as consistent as possible.  Many organizations use an ACH deposit or wire transfer to ensure funds are transmitted timely.  If the funds are not deposited within the correct timeframe you will have to compute any lost earnings and pay those earnings to the participants.

What I have run into most frequently is plans which did not follow the provisions for enrollment or auto-escalation. There are ways for an organization to self-correct under the Voluntary Fiduciary Correction program when this is discovered. The IRS has tools to calculate the amount owed to an employee, including gains and losses to ensure you are adding the right amount of money to an employee’s account. (And for definitions of terminology, click here for a link to the IRS website.)

The most important piece of advice I can offer is to familiarize yourself with the plan documents, specifically the adoption agreement, as soon as possible, and then use your support resources to help ensure you administer the plan the way it was designed.  The more questions you ask, the more you will know.  Best of luck!