Here’s a public service announcement for all plan sponsors of 401(k)s. Remember the quote from "Jerry Maguire," “Help me help you?” It’s been 22 years since that movie, but it still holds true today.
Here are seven tips for plan sponsors to avoid expensive 401(k) plan mistakes and hours of tedious cleanup.
- Deposit contributions timely. This sounds pretty straightforward, right? If your payroll is monthly, you should be depositing monthly. If your payroll is weekly, you should be depositing weekly. Late deposits are bad news. You may need to pay lost earnings and excise taxes or go through a formal correction program with the IRS (VCP) which could be expensive. Additionally, you need to report late deposits on the Form 5500 which may trigger a plan audit.
- Upload contributions to correct money type. Employee money and employer money are different. What I mean here is that different money types have different distribution rules and possibly different vesting schedules. It may take hours for a TPA to unravel the messiness of mixed money types. Deferral dollars are always immediately 100% vested. Profit sharing may or may not be immediately vested. And even though safe harbor dollars are always 100% vested, this money type is ineligible for certain withdrawals.
- Learn plan provisions. Knowing your plan provisions is smart business. If you are not familiar with how the plan operates, you are at risk for expensive mistakes. For example, missing a participant's eligibility date without giving him the opportunity to defer into the plan could cost a plan sponsor makeup deferral dollars as well as employer contributions. If missed long-term, the error could require a formal correction with the IRS. The opposite could also occur where a participant entered the plan too soon. In this case, the money has to be returned to the participant. Other common errors in include premature distributions, hardship withdrawals and ineligible sources for loan distributions. Take the time to revisit your plan document. If in doubt, ask your TPA.
- Communicate with your TPA if you are buying or selling another business. What does this have to do with my 401(k) plan anyway? Well, depending on ownership, it could be defined as a controlled group or an affiliated service group. This information is necessary as it has to be disclosed in your plan document. Furthermore, it may be necessary to give employees of your other business a retirement benefit.
- Stay on top of participant loans. With the exclusion of loans used to acquire a principal residence, the repayment period is capped at five years. If a loan is not being repaid regularly, it should go into default where the participant would owe taxes on the unpaid portion plus interest. It is common for owners to take a loan and later run into repayment problems because they do not receive a regular paycheck like
staff. A little preplanning could eliminate any mishaps down the road.
- Understand the importance of census data. What’s the old saying, “garbage in, garbage out?” TPAs are only as good as the data they receive. Incorrect compensation and incorrect dates can cause major issues. Let’s look at some quick examples:
- Jan's compensation was reported as $60.000, but the correct compensation was $90,000. An additional benefit is now due (which could be after you file your corporate return).
- An incorrect birthdate could have a significant impact on a cross-tested plan design. Depending on true age, this participant may need a significant increase
totheir original profit sharing contribution.
- An overlooked termination date could also cost the plan an unnecessary top-heavy minimum contribution.
- An excluded classification without noting such on census could result in an ineligible contribution.
If you work with a payroll provider, reports can be generated that will capture accurate data.
- Maintain all records including amendments, hardship documentation and beneficiary forms in case of a random audit. Hardship documentation and current beneficiary forms are maintained by the plan sponsor. If you offer online enrollment, your responsibility to maintain beneficiary information still applies. If a participant chooses someone other than a spouse, their form needs to be signed off by their spouse acknowledging such and witnessed by a third party. A will does not trump a beneficiary form. In other words, if you are remarried, but still have your ex as your primary beneficiary, your ex could be the sole recipient of your retirement plan balance.
These simple steps will keep your retirement plan in check. If you have any questions about the content, click on the box below to connect with a 401(k) expert.