The IRS recently published a list of the most common plan management mistakes made by 401k plan sponsors. It provides insight into where most companies run into issues when managing their plan. The list reveals that mistakes are made in almost every aspect of plan administration with the most common focusing on properly updating and following plan documentation. JLK Rosenberger wants you to be aware of these errors to help ensure your plan(s) are not experiencing the same issues.
- Failure to Update Plan Documents – The most common mistake identified was failure to update plan documents in a timely manner to reflect changes in the law. A basic legal requirement of all 401k plans is they must be established by and run according to a formal written plan document that complies with IRS regulations. As new tax laws come into effect that impact 401k plans, the change must be incorporated into the plan documents. Typically, the IRS provides a firm deadline by which updated plan amendments must be adopted. It is important to note that this applies to all 401k plans, whether active or not, as long as there are assets in the plan. The consequence of non-compliance is that the plan will no longer be considered a qualified retirement plan subject to favorable tax treatment by the IRS.
- Failure to Follow Terms of the Plan – Another mistake identified was failure to base the plan’s operations on the terms in the plan documents. The plan sponsor is required to update plan documents on a regular basis (as outlined above). However, there are often times many vendors, tax professionals and others servicing the plan are not aware of changes made to plan documents. Remember, any changes made to the plan documents or operations should be conveyed to everyone servicing your plan. For example, if you amend your plan document to change the definition of compensation, you should communicate that change to all persons involved in determining deferral amounts withheld from the participant’s pay, performing your plan’s nondiscrimination tests or allocating employer contributions. Also, if you decide to use a different definition of compensation in operation, make sure you amend the plan timely to reflect that change.
- Misapplication of Matching Contributions – Another common mistake found was that sponsors did not properly provide employer matching contributions to all qualifying employees. In many cases, the IRS found the problem was commonly caused by failing to properly counter hours of service or identify proper plan entry dates. Additionally, errors also resulted when the plan sponsor or service provider was using the incorrect definition of compensation described in the plan document for determining matching contributions. The IRS also found that misapplication was occurring in several cases because of the timing of matching contributions. Plans generally describe these matching contributions in terms of annual amounts and percentages. If matching contributions are calculated on a payroll period basis, rather than on an annual basis, at the end of the year, the sum of these amounts could be incorrect.
- Failing Non-Discrimination Tests – Plan sponsors must annually test traditional 401k plans to ensure the amount of contributions made by non-highly compensated employees (NHCE) are proportional to contributions made by owners and manager. As the NHCE’s save more for retirement, the rules permit that Highly Compensated Employees (HCE) can also save more. Most plans failed these tests because there was a discrepancy between the amount being saved by HCEs over NHCEs. If your plan fails the tests and the mistake is not corrected on a timely basis, it may result in plan disqualification.
If you are looking for additional direction on plan compliance or would simply like to ensure your plan is not experiencing any issues, then contact us today. We work with plan sponsors across the West Coast ensuring they are in compliance and ready for their annual retirement plan audit. For additional information, please contact JLK Rosenberger at 949-860-9902, or click here to contact us.