Are you prepared for your retirement plan to be audited? For many of us, that is a tough question to admit the real answer. The Department of Labor estimates that at least six in 10 plans are out of compliance! As a way to help you proactively prepare, we've compiled our "Top Three Retirement Plan Audit Findings" list of the most common errors and what you can do to avoid them.
Error #1: Late Remittance Of Employee Contributions
It is very common for plan administrators to have at least one delinquent remittance each year. The problem is that late remittances are considered to be a loan to the employer and therefore a “prohibited transaction,” which could lead to plan disqualification.
Employee contributions must be remitted as soon as they can reasonably be segregated from sponsor assets. This needs to be no later than the 15th business day of the following month. There is a seven business day safe harbor for small plans of fewer than 100 participants. Larger plans are offered no safe harbor.
Most payroll providers offer integration directly to recordkeepers which is a great way to ensure timeliness of employee contributions. Additionally, cross training employees so there are backups for vacations or illnesses. Consistency is very important, if it is demonstrated that you can deposit employee contributions earlier even once, then that could be used as the new standard for your plan.
There are two options for correcting a late remittance of employee contributions. You can self-correct or use the Voluntary Fiduciary Correction Program (VFCP) provided by the Department of Labor (DOL).
If you self-correct, lost earnings will be calculated based on actual investment returns. You will need to file Form 5330 and pay an excise tax on the lost earnings. With the VFCP, lost earnings are based on a DOL interest rate calculator. You have to file an application with the DOL, but you will not have to pay an excise tax.
Error # 2: Usage of Incorrect Definition of Compensation
Most plan contribution amounts are calculated based on compensation. However, there are various ways that “compensation” can be defined, and often plan sponsors are not aware of how it is defined in their particular plan. Using the wrong definition of compensation will likely lead to incorrect deferral amounts and employer contributions.
Compensation must be defined by the plan document. There is also an annual limit to the amount of compensation that can be considered when calculating permitted contribution amounts.
Review the plan document to ensure your understanding of the definition of compensation. Additionally, payroll codes should be audited at least annually to ensure that they agree with the definition of compensation found in the plan document. Establish a procedure for adding pay codes that ensure they are configured correctly. You may find that your plan documents define compensation differently than originally intended. If that is the case, consider amending the plan to conform to your desired definition of compensation.
Using an incorrect definition of compensation can lead to two kinds of errors: excess contributions or under-contributions. In the case of excess contributions, excess deferrals need to be distributed along with their earnings. Excess employer contributions are automatically forfeited. For under-contributions, the employer must pay 50% of the "under" deferral and 100% of any "under" match or profit sharing. All amounts must be adjusted for lost earnings, as well.
Error #3: Eligibility
Most commonly there is a misunderstanding of eligibility requirements by plan administrators. Additionally, many plans have multiple eligibility requirements for different plan contributions, resulting in misapplication of entry dates.
The plan document is what defines eligibility. The DOL has set limits to restrict how long an employee can be prohibited from participating in a plan. The longest a plan can require a hold on eligibility is until an employee reaches age 21 and has worked for the employer for one year consisting of at least 1,000 hours. If your plan requires a one year wait, then you are required to offer semi-annual entry dates, at a minimum. Certainly plan sponsors can provide for much earlier eligibility if they so choose.
Once again, it is vital to read the plan document to fully understand eligibility requirements. Further, requiring the folks that will be administering eligibility to be trained on plan eligibility provisions would help minimize errors. It is also helpful to offer a robust employee orientation with a clear discussion of eligibility. The fewer entry dates you offer, the easier it will be to manage. If you don’t offer immediate entry, it is a good idea to perform an employee audit at each entry date that you do offer. Auto-enrollment can help prevent errors due to inadvertent errors in calculating eligibility.
If one of your plan participants missed a deferral opportunity because of an eligibility error that you made, you are required to correct it and possibly pay penalties. Penalties include: paying 50% of the missed deferral based on Actual Deferral Percentage for the employee’s group (whether a highly-compensated employee or not). This payment must be adjusted for lost earnings and immediately 100% vested. Any employer contribution missed must also be paid and adjusted for lost earnings.
How Stonebridge Can Help
It can be a bit overwhelming to administer a company retirement plan, given all the documentation nuances let alone the deadlines! At Stonebridge Financial Group, we work exclusively with retirement plans and can help you with everything from designing to running your plan. Delegating fiduciary responsibilities can be a great solution for plan sponsors who lack time and the knowledge of ever-changing requirements to manage a retirement plan -- it's is all we've done since our inception back in 2004! Our robust service offering starts with ERISA 3(21) and 3(38) services and is the tip of the iceberg. We are consultants that help you with every aspect of your plan:
- Plan governance including the committee charter and investment policy statement
- Fee and plan benchmarking
- Implementing cybersecurity best practices
- Ensuring participant retirement readiness
- 1:1 and group participant education and retirement readiness meetings
- Consulting on financial wellness
- Committee fiduciary training
- Process creation and documentation
- Plan design
- Contribution match modeling
- Annual plan compliance review
- And so much more
We become your outsourced retirement plan officer who dives into the morass of retirement plan details and resolves issues so you don't have to!
Please click here to schedule a short call, give us a call at (855) 530-0500 x601 or email firstname.lastname@example.org. We look forward to helping your committee successfully fulfill their fiduciary duties with ease and excellence!