Top 10 Issues Found in 401(k) Plans

1. Failure to understand and follow the plan’s definition of compensation: Look at the actual plan document (not the Summary Plan Description) and note the compensation that should be used to calculate contributions. Does your plan include bonuses or exclude them? How does it treat overtime pay? Coordinate the document with your payroll and HR people. You must follow the plan document. If your document is not written the way you want to handle various kinds of compensation, you must speak to your document provider and change it.
2. Late or erratic contribution of employee deferrals: Contributions must leave the plan sponsor’s bank account and be in the trust as soon as administratively feasible following the time deferrals are withheld from an employee’s paycheck. “Small Plan Filers” (those with fewer than 100 eligible participants) may deposit employee contributions and loan repayments up to 7 business days from the payroll date. “Large Plan” filers do not have a permissible 7 day time period. Consistency is equally important. If some contributions are made 3 days after the payroll and some are made 7 days after the payroll, 3 days is the rule for your company. Contrary to some articles you may read, and except for the small plan 7 day rule, there is no “safe harbor” for depositing employee deferrals. These assets are plan assets when they are withheld from the participant’s paycheck. These deposits and timing rules also include loan repayments.
3. Failure to amend the plan document for tax law changes: The “PPA Amendment and Restatement” period ended for most plans on April 30, 2016. You should have an executed (signed) copy of your plan or its Adoption Agreement, the Basic Document (if it is a prototype with an Adoption Agreement), a Summary Plan Description dated the same date as this restated plan (which should be distributed to all eligible employees) and a copy of the IRS Letter which accompanies your plan document.
4. Misunderstanding of eligibility and vesting rules: Your plan may have different rules for eligibility (who should be covered by the plan), vesting (what percentage of employer contributions a terminated employee is entitled to) and allocation (rules concerning employment required in order that an employee receive an employer contribution in his or her account). Review each of these rules with your provider and make sure your H.R. or payroll people (or vendor) are applying them correctly.
5. Growing forfeiture accounts: All plans have rules concerning forfeited balances left by employees terminating prior to 100% vesting. Forfeitures must be used according to the plan document and within a prescribed time frame.
6. Impermissible in-service withdrawals: In-service means that the employee still works for you. There are rules in the plan document (and in the law) concerning permissible in-service withdrawals. Safe Harbor Hardship rules, for example, are very specific. Look them up in your plan and follow them when a hardship is claimed (assuming you have hardships in your plan). If there is no Hardship withdrawal provision in your plan (not all plan include them; this is an employer choice variable), then there can be no hardship withdrawals. Read your plan and make a list of the occasions when a Participant can withdraw money from his or her account. Make sure everyone involved with your plan understands and uses these rules.
7. Failure to follow plan loan provisions: If your plan permits loans, there are specific rules concerning obtaining a loan and monitoring the repayments. Who is responsible for knowing when a loan from your plan is in default and what should be done? This is not automatic and a review of this should highlight the loan rules operational for your plan.
8. Failure to accurately perform or pass the ADP/ ACP nondiscrimination tests: These tests must include everyone eligible for the plan and they must be performed using the correct definition of compensation. Who prepares the census that your TPA or vendor uses for testing? Is this being done using compensation as defined in the plan? Does it include everyone eligible whether or not the individual is participating?
9. Is matching and/ or profit sharing calculated and contributed correctly? A sampling test (look at a few participant accounts selected at random) should be made to be sure that each Participant has received the correct amount in a plan year. If these contributions are calculated by an individual, is that person familiar with the rules in the plan document concerning the amount and timing and eligibility of participants for these employer contributions? If these contributions are made in the payroll system, are the correct formulas in the system and is the system using the correct definition of compensation?
10. Is your plan “Top Heavy?” And if so, how does it comply with the Top Heavy rules? The law requires that if account balances or accrued benefits of key employees (this is not the same as Highly Compensated Employees) comprise a substantial portion of plan assets (generally 60%), certain contribution rules must be followed. This may involve a special contribution to non-key employee accounts.

Key documents are your plan document (know where it is and what it says) and the Summary Plan Description (which should be distributed to Participants and should accurately reflect your plan). Be sure to review these documents with your staff in Human Resources and Payroll and ask questions of your document provider if you have them.

Required Attribution

This article was originally posted by QBI LLC

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