By Jackie H. White, CPA, Partner
As Published in Employee Benefit Plan Review
There’s no doubt the economic downturn of the past few years has affected nearly every American in some way, shape, or form. From ongoing housing foreclosures to continued high unemployment, we have all felt the sting of the Great Recession. As a result, many businesses are stretched even further and many employees are taking on additional job duties as companies downsize.
Couple this with new and ever-changing government regulations and the individual now responsible for handling employee benefits and 401(k) retirement accounts may begin to feel completely overwhelmed, or worse, may not even know that an annual check-up is recommended in order to maintain compliance.
As the sponsor of 401(k) and other types of pension plans, the employer is responsible for ensuring that plans comply with federal law – including the Employee Retirement Income Security Act (ERISA). An employer potentially could face serious repercussions from the Department of Labor (DOL) and/or the Internal Revenue Service (IRS) if the company is not in compliance.
An annual 401(k) plan check-up could prevent those headaches downstream. To help with the annual check-up, many employers rely on a variety of service providers – such as Third Party Administrators (TPAs), brokers, and accountants – to advise and assist them with their employee benefit plans. For this reason, selecting a competent team of advisors is essential.
To ensure your organization’s 401(k) plan is compliant with current regulations and in the best health possible, review the items found below. It’s worth noting that plan sponsors can always use the Department of Labor’s and the Internal Revenue Service’s websites for additional information on these topics and to locate other helpful resources.
A Plan Sponsor’s Annual 401(k) Plan Check-up: What You Need to Know
A service provider can make or break an organization when it comes to benefit plans, so it is extremely important to look for reputable, proactive service providers. While a plan sponsor may use a TPA or broker, the plan sponsor is still responsible for ensuring plan compliance, according to the government. For that reason alone, the employer needs to be on top of applicable regulations and cannot rely solely on the plan service providers.
Additionally, a plan sponsor should monitor service providers for the following: make certain they are committed to providing regular information and updates; ensure they possess all required state and federal licenses; evaluate provision of services – and costs – for consistency with agreements; and maintenance of a fidelity bond if handling plan assets.
With the help of your plan service providers, organizations should update plans on an annual basis to reflect recent changes in the law. Many TPAs will provide a cumulative list of changes, which will help in keeping the plan current with regards to regulations. Contribution limits, elective deferrals, and withdrawal rules are subject to changes and, therefore, should be checked regularly. By not performing an annual check-up the plan sponsor might miss addressing changes in the law, which could leave the organization exposed to repercussions from the DOL or the IRS.
If a plan sponsor finds that their plan isn’t compliant, it is essential to become compliant, which may lead to the need to amend the plan. The IRS website provides a user-friendly Fix-It Guide for those that need to become compliant. The majority of the time, the reason for non-compliance simply comes down to a lack of awareness on the part of the plan sponsor. Ensuring the plan’s operations are based on the terms of the plan document, however, is necessary – further underscoring the need for the annual check-up.
A plan sponsor and their service providers should also determine if the plan has satisfied the 401(k) nondiscrimination tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. In addition, a plan sponsor should ensure Form 5500 is filed timely through the EFAST system, which simply means it needs to be completed and filed electronically. And, if the plan is required to have an audit, the plan audit must be uploaded with the electronic filing for the Form 5500.
Another aspect of plan operations that has been a source of confusion for plan sponsors – and in some cases, could create issues with the DOL – centers around depositing 401(k) plan employee contributions in a timely manner. Employee contributions must be deposited in the 401(k) plan on the earliest date possible, but no later than the 15th business day of the month following withholding or receipt by the employer. While this has come to be known as the “15-day rule,” the reality is this rule does not exist. The DOL’s position is that “timely” is as soon as it is reasonably possible to segregate participant contributions from the company’s assets. For some companies, this could be within a day or two.
The majority of plan sponsors want to keep participants updated and informed about their plans. Interestingly, providing information is also a requirement for the sponsor. Employers must provide their employees with the most important facts they need to know about their retirement plans, including plan rules, financial information, and documents on the operation and management of the plan. Some of this information must be provided to participants regularly and automatically by the plan administrator. Other information must be available upon request. Any information provided to or requested by plan participants must be done in writing.
One way to assist with the information and disclosure requirements is by reviewing the Reporting and Disclosure Guide for Employee Benefit Plans, published by the DOL’s Employee Benefits Security Administration. This guide contains an extensive list, spelling out what information and disclosures plan sponsors are required to provide participants.
Additionally, plan sponsors need to take into consideration monitoring fees and current bonding requirements. Fees, which are paid from plan assets, need to be paid in accordance with all agreements. This is true whether the fees are paid for the plan audit, to the TPA, or others. The sponsor also needs to ensure all parties, including themselves, who handle plan funds or property are covered by a fidelity bond. Since funds and property fluctuate, the bonds need to be evaluated annually to ensure there is proper coverage.
Finally, as self-directed plans become more popular, plan sponsors need to ensure they are providing adequate information to those participants since employees need the information in order to make educated decisions about how their assets are invested. Currently, there is no official guidance on this issue, but both participants and regulatory bodies are expressing concern and beginning to take notice of asset diversification in plans. Getting into the habit of providing this information and updating it annually will benefit both the employer and employee.
In Conclusion
Prevention is the best medicine. Plan sponsors must stay on top of regulations and should turn to responsible service providers to help maintain compliance. But with so many regulations, mistakes still can occur in the handling of a plan, even with the best intentions. Luckily, many headaches can be prevented with an annual check-up.
Jackie H. White, CPA, is a Partner at Witt Mares, PLC, a regional accounting and consulting firm serving clients throughout the Mid-Atlantic. For more information, please contact the author at jwhite@wittmares.com.