At this time of year, there is a lot of focus on your retirement plan. Your administration team is focused on gathering data, completing various compliance tests, and setting your plan up for another successful year. You are likely focused on all your fiduciary responsibilities that get more demanding during this time. Disruptions of any kind may make it much more difficult for you and your administration team. One of the primary disruptions to accomplishing the necessary plan work is the discovery of plan errors. We have identified the three most common administrative errors found during the year-end review process and have identified causes, effects, and remedies. We hope this information will help you eliminate errors and make it easier to maintain a qualified and successful retirement plan.
Misunderstanding or Failing to Follow the Terms of Your Plan
Retirement plans are complex and following the plan document exactly is a must. That means that understanding your plan is crucial to the success of your retirement plan and its administration. As the plan sponsor/fiduciary—meaning that you have control over the management of the plan and assets—you have a responsibility to ensure you adhere to the provisions of the plan. All the information you need to know is in your legal plan document. Here are some examples of the kind of information you need to be familiar with: What compensation should be used to calculate contributions? Does your plan include bonuses or exclude them? How is overtime pay treated? Due to the nature of the provisions listed here, you’ll need to coordinate with your payroll and HR teams to certify that the document is followed. If your document is not written the way you would like it to be, you can speak to your document provider and modify it to meet your needs.
Enrollment, Deferral or Deposit Errors
When an employee becomes eligible to participate in your retirement plan—according to the provisions of your legal plan document—they must be enrolled. If they are not given the opportunity to enroll, it becomes a missed enrollment. Missed enrollments lead to missed deferrals which lead to deposit errors. None of these errors are good for your company or your retirement plan as they can cause a lot of extra work, the need to use government correction programs, and to pay extra fees. Your retirement plan administrator will not necessarily know when employees become eligible. This generally falls to your HR team, or the internal person assigned to “handle the plan” within your company. Most times, these errors are caught by self-reporting. This means that you must be diligent in knowing eligibility and entry dates. More importantly, you must have a system in place to ensure that eligible employees are never missed, even when the party responsible for keeping up with eligibility is out of the office. If an employee is missed, you must self-report to your advisor or your service provider/ third party administrator. The sooner you catch and report the error, the easier it will be to correct. Generally, the process to correct missed contributions stemming from missed enrollment involves contributing half of what the employee should have been contributing all along as well as the full amount of any employer match that may be in place. This money comes from the Plan Sponsor, not the employee. If an employee does not want to participate in your plan, it is important to get them to opt-out in writing. You’ll want to save that in your files so that you cannot be accused later of not offering them the chance to participate in the plan. Every plan and situation is different, making the solution unique to each situation.
Failure to Accurately Perform or Pass the ADP/ACP or Top-Heavy Nondiscrimination Tests
401(k) contributions result in tax advantages. As such, it is important that the 401(k) plan benefits all employees, not just owners and executives. This is where nondiscrimination testing comes in. There are three primary types of nondiscrimination tests (NDTs): Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and Top-Heavy Tests. The ADP test compares the average salary deferral percentages. The ACP test compares the employer match contributions and includes after-tax employee contributions. Top-Heavy Tests are performed to determine if the sum of all key employee account balances is more than 60% of the total plan balance. If they are, then the plan is top-heavy. The only way to bypass testing is if you have a Safe Harbor 401(k) Plan. Safe Harbor plans are exempt from ADP and ACP testing and may be able to pass Top Heavy requirements because this plan design requires employer contributions. If you fail NDTs, you may retest using different testing methods to achieve the best result for your plan. Your service provider or Third Party Administrator should be performing these tests to determine which method provides the best result for your plan each year. If your plan fails NDTs, you are required to remedy the plan or risk losing qualified plan status. The remedy will look different for each plan. When you correct your plan, it may impact the Plan Sponsor and/or individual plan participants and may have an effect on tax reporting and obligations. Your plan document will describe the corrective action that must be taken.
