Plan sponsors have a lot of responsibilities and often rely on others to help them keep their plan operating in accordance with the law. And yet, even with the most attentive plan sponsors, mistakes (still) occur. Here’s a list of some of the most common missteps:
1. Not using the plan’s definition of compensation correctly for all deferrals and allocations.
term “compensation” has several different applications in qualified
retirement plan operations, depending on the particular compliance goal.
For example, a plan may use one definition of compensation to allocate
employer contributions and a separate, distinct one for testing whether
employee salary deferrals are nondiscriminatory. Note that one of the
top plan compliance concerns identified by the IRS is a failure to
identify and apply the correct definition of compensation in a
Note that while plans often use different
definitions of compensation for different purposes, it’s important to
apply the proper definition for deferrals, allocations and testing. A
plan’s compensation definition must satisfy rules for determining the
amount of contributions.
You should review the plan document
definition of compensation used for determining elective deferrals,
employer nonelective and matching contributions, maximum annual
additions and top-heavy minimum contributions. Review the plan election
forms to determine if they're consistent with plan terms.
Not following the terms of the plan document regarding the
administration of loan provisions (maximum amounts, repayment schedules,
etc.) or hardship withdrawals.
Plan documents routinely
provide that hardship distributions can only be obtained for certain
very specific reasons, and that participants first avail themselves of
all other sources of financing before applying for hardship
distributions (these conditions often are incorporated directly from the
requirements of the law). Similarly, loans are permissible from these
programs only when they comply with certain standards regarding the
amount, purpose, and repayment terms.
Failure to ensure that these
legal requirements are met can, of course, most obviously result in a
distribution not authorized under the terms of the plan document—and,
since these types of distributions are frequently quickly spent by
participants (and thus not readily recoverable), it can be complicated
and time-consuming to set the situation right.
Oh – and don’t forget that we now have some updated final regulations on hardship distribution and conditions.
3. Not depositing contributions on a timely basis
legal requirements for depositing contributions to the plan are perhaps
the most widely misunderstood elements of plan administration. More
significantly, a delay in contribution deposits is also one of the most
common flags that an employer is in financial trouble – and that the
Labor Department is likely to investigate.
Note that the law
requires that participant contributions be deposited in the plan as soon
as it is reasonably possible to segregate them from the company’s
assets, but no later than the 15th business day of the month following
the payday. If employers can reasonably make the deposits sooner, they
need to do so. Many have read the worst-case situation (the 15th
business day of the month following) to be the legal requirement. It is
4. Failing to obtain spousal consent.
IRS has long noted that a common plan mistake submitted for correction
under the Voluntary Correction Program (VCP) is the distribution to a
participant of a benefit in a form other than the required QJSA (e.g., a
single lump sum) without securing proper consent from the spouse.
often happens when the sponsor’s HR accounting system incorrectly
classifies a participant as not married (or when the participant was not
married at one point and subsequently got married – or remarried). The
failure to provide proper spousal consent is an operational
qualification mistake that could cause the plan to lose its
5. Paying expenses from the plan that are not eligible to be paid from plan assets.
sponsors are frequently interested in what expenses can be paid from
plan assets. It’s important to keep in mind, however, that the first
step in that determination involves making sure that the plan document
actually allows the payment of any expenses from plan assets.
that the plan allows it, the Department of Labor has divided plan
expenses into two types: so-called “settlor expenses,” which must be
borne by the employer; and administrative expenses, which – if they are
reasonable – may be paid from plan assets. In general, settlor expenses
include the cost of any services provided to establish, terminate, or
design the plan. These are the types of services that generally are seen
as benefiting the employer, rather than the plan beneficiaries.
expenses include fees and costs associated with things like amending
the plan to keep it in compliance with tax laws, conducting
nondiscrimination testing, performing participant recordkeeping
services, or providing plan information to participants.
imposes a duty of prudence on plan fiduciaries that is often referred to
as one of the highest duties known to law – and for good reason. Those
fiduciaries must act “with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.”
Oh – and if
you’re not “familiar with such matters” – or aren’t certain of that
status – it’s a good idea – one might even say “prudent” – to engage the
help and support of someone who is.
p.s.: Oh, and when a mistake does occur, check out the IRS Fix-It Guide at https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide.
- Nevin E. Adams, JD