Top 10 Items Discuss with Your 401(k) Provider

By Joné E. Liuzza, ERPA, QPA, QKA

Joné E. Liuzza, ERPA, QPA, QKA

Joné E. Liuzza, ERPA, QPA, QKA Director of TPA Services

As a business owner and entrepreneur, you are constantly being pulled in several different directions. You have a 401(k) plan in place as a robust benefit for your employees and rely on your Third Party Administrator (TPA) to help keep your plan compliant.

TPAs strive to administer your year-end valuation flawlessly and deliver an excellent work product. However, an excellent deliverable is largely contingent on the data that is shared. As a plan sponsor, it is critical to know what can derail a plan and why.

Here are 10 items that you need to discuss with your TPA sooner than later to avoid any future corrections that could be messy as well as costly.

  1. Plan provisions:

There are a host of plan provisions that shape the anatomy of your plan. What do you consider compensation? Are bonuses included or excluded from compensation? What are the service requirements and entry dates? Is the plan paying TPA fees or will that be paid outside the plan by the employer? Participant exclusions, vesting and distribution options are other plan provisions spelled out in your plan document. Mutual mystification is what we want to avoid here. Ask questions and then ask more questions. The plan must be operated according to the plan document to avoid any plan corrections and possible plan refunds. Here is a link to five things you need to know before adopting a 401(k) plan.

  1. Hire family members or other key executives

It is important to share with your TPA if you have family members on payroll and what your objectives are regarding the plan. It is equally important to share considerations including adding a child to the plan at later date -- upon college graduation perhaps. A Highly Compensated Employee (HCE) is defined as 1) an employee who owns greater than 5% of the organization or 2) an employee who earned $130,000 (current threshold, but indexed) in the prior year. Family attribution comes into play and identifies any spouse, parent, grandparent or child as an HCE for plan purposes. This may have implications with contribution limits and certain discrimination tests. In a cross-tested plan design, it may be cost prohibitive to give a benefit to your child. Many factors are considered including the child’s age, other HCEs benefitting and the percentage allocated to the NHCEs (Non-Highly Compensated Employees).

  1. Change plan provisions arbitrarily

If your current plan document excludes professional associates as an example, but you decide to include one associate as a recruiting tool, your plan needs to be amended for this allowance. Is your intent to allow just one associate in or all future associates in the plan? There may be ways to accomplish bringing in one, but it is possible this change will have other implications that could be costly. Your TPA will be able to spell out the pros and cons of changing your plan document. 

  1. Take loan or other distribution from the plan

If you call your advisor to get money out of the plan, they may assume you have coordinated the distribution with your TPA. Is it a loan? Is it an in-service distribution? Does the plan permit such distributions? Documentation is absolutely necessary. Was there is a 1099R issued? Is there a loan agreement with a reasonable amount of interest and an amortization schedule? If the IRS randomly selects your plan for an audit, documentation will be requested and reviewed for compliance.

  1. Invest in real estate for the plan

Real estate in your plan can be tricky. Do you use this real estate for your own benefit? For instance, do you own a beach home that you use on a regular basis? Do you offer this home to your children and family friends? This would be considered a prohibited transaction. You cannot have an asset in the plan for your own benefit. This will result in paying a steep tax penalty of 15% of the amount involved for each year in the taxable period and possibly additional taxes on top of that. Being aware of a plan’s dos and don’ts is key.

If you have legitimate real estate in your plan, are you getting it properly valued every year? Is this appraisal performed by a third party? Having a pooled trust without proper documentation is a huge red flag and could be referred to the Department of Labor.

  1. Incur a business hardship and can no longer fund safe harbor

As a plan sponsor, you offer a 401(k) plan for the tax savings and employee benefit. However, sometimes unforeseen business hardships arise – a pandemic for example. Safe harbor money types are typically set in place prior to the beginning of the plan year and considered nonelective. If your business is facing a hardship and you would like to stop safe harbor contributions, your TPA can assist with the mechanics. A 30-day participant notice will have to distributed to all plan participants. The change in your safe harbor status will trigger an ADP/ACP test. Your TPA can offer you suggestions to avoid or minimize any excess contributions.

  1. Buy another company

While it may not seem important to tell your TPA that you bought another company that is totally unrelated to your company’s qualified plan, it in fact matters. A controlled group is defined as two or more business entities with common ownership and must be treated as a single employer for qualified plan purposes. If your intention is to offer a 401(k) plan to one company, but not both, you may run into coverage issues. Furthermore, if your spouse owns a company that is related to your business, it may also be considered a controlled group. Controlled group rules can be complex, but your TPA will be able to explain options and plan implications.

  1. Any type of business change (address, CPA, payroll provider, etc).

TPAs work very closely with your business partners. Keep us updated on any changes so we can keep our records accurate.

  1. Notices from the IRS or DOL

The IRS may randomly choose your plan to be audited. An IRS audit does not have to be scary. Contact your TPA and furnish them a copy of the notice as soon as possible. In most instances, your TPA can handle or assist with the audit on your behalf. An audit requires a lot of documentation including payroll data, compliance testing, proof of timely deposits, loan documentation for all participants, distribution records, etc.

If you are not submitting employee contributions into the plan trust on a timely basis, the Department of Labor may investigate your plan for misuse of plan assets. This could be a serious infraction and could result with your plan being sanctioned. We highly recommend that you deposit employee contributions as soon as administratively feasible.


  1. Would like to get more out of 401(k) Plan

If you are reaching the maximum contribution limit on your own and have an appetite for a greater tax savings, ask your TPA about layering a second plan on top of your existing plan. In some instances, a cash balance plan works beautifully as a second plan. Make sure you voice your objectives and goals for the plan.

If you are considering starting a plan or would like to take a look at different options for your current plan, we are happy to speak with you and see how we can meet your business goals and objectives.

Talk to a Retirement Plan Expert Today

— Topics: Investments, Financial Planning