Inadvertent errors that 401(k) plan sponsors make are
“ubiquitous,” says Natascha George, a partner in the ERISA & Executive Compensation
Group at Goodwin Procter LLP in Boston. If
plan sponsors and advisers coordinate with the plan’s auditor and providers,
they can avoid mistakes, says Steven Bogner, managing director at HighTower
Treasury Partners in New York. It is also important that the sponsor hire a
seasoned human resources (HR) director who has experience overseeing 401(k)
plans. The most successful way to avoid mistakes “is ensuring good
communication among all of the parties” that are responsible for the plan—human
resources, payroll, the retirement plan adviser, the recordkeeper, the
accountant, the third-party administrator, providers and Employee Retirement
Income Security Act (ERISA) attorneys.
Most commonly, information is missing on their Form 5500 or
audit report, Bogner says. The Department of Labor can fine you $1,100 a day if
you do not file a Form 5500 correctly. When plans reach the size of at least
120 participants, they need to do a full audit, and they frequently overlook
this. In addition, plans need to invest participants’ deferrals in a timely
manner, Wagner says.
Additionally, if an employee earns a bonus, sponsors can
have difficulty calculating their compensation and the company match, George
says. It can also be exacerbated if the employee earns a commission, overtime,
tips or premium pay that is excluded from the calculation of their total
compensation, Wagner adds.
According to Fred Reish, chair of the Financial Services
ERISA practices at Drinker, Biddle & Reath in Los Angeles, plans can also
be in error if they allow a participant to exceed the IRS’ limits on deferrals.
For 2015, they are $18,000, with an additional $6,000 catch-up for those ages
50 and older.
The most common error that Wagner sees is “plan documents
that aren’t updated.” This occurs because many sponsors use plan document
prototypes from providers. Sponsors can avoid this error by running the
document by an ERISA lawyer to do a “gap analysis.”
Other common mistakes can cause plans to not pass the actual
deferral percentage (ADP) test and the actual contribution percentage (ACP) test.
This can be due to not correctly identifying highly compensated employees
(HCE), excluding those who elect not to defer salary from the test, or not using
the correct definition of compensation.
Then there is the problem of a plan permitting a participant
to take out a hardship withdrawal that does not meet the specifications for a
hardship withdrawal. Companies tend to make mistakes with hardship withdrawals
when they handle them directly, rather than having their provider do so. As for
loans, many plans do not ensure that the money is paid back in a timely manner
or do not require repayment in the permitted five-year window. Plans also need
to ensure that they do not permit loans in excess of the $50,000 maximum
allowed.
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