Many employers offer retirement plan benefits to their employees such as a defined contribution plan (401k plan) as an additional incentive to work for their company. It is important that the employers know their fiduciary duties and know the implications that can occur if a plan is not properly administered.
When a plan is not administered in accordance with the Division of Labor (DOL), the Internal Revenue Service (IRS) guidelines, or the internal plan document, this could mean that your plan is at risk. Employer reimbursements, penalties, and interest could be required to be paid by the employer. Depending on the timing of when these errors are corrected, the impact can be substantial to the employer.
Many employers will hire plan trustees and advisors to help administer the plan and make sure that the plan is operating in accordance with these regulations and guidelines; however the overall fiduciary duties fall back on the employer and it is important that employers know their responsibility as the plan sponsor.
One of the biggest areas of mistakes in administering employee benefit plans is understanding the governing document (the plan adoption agreement) of the plan and making sure that the plan is following the definitions and elections in accordance with the plan adoption agreement.
Areas of importance include, but are not limited to, employee eligibility, vesting requirements, types of distributions that are allowed, participant loan policies, and the definition of plan compensation.
Knowing the definition of plan compensation is highly important to the plan. For example, if compensation is defined as all W-2 wages, depending on the types of compensation that the employer offers, this could include fringe benefits, bonus pay, commissions, etc. If deferrals are not correctly withheld from these types of wages depending on the employee’s election, the employer could face having to contribute to the employees balance for up to 50% of the missed employee deferrals, as well as 100% of the missed employer contributions on those wages, and lost earnings for the time period that the employee would have had these deferrals. This can create significant time and expertise for the employer to calculate the missed deferrals as well as create a significant liability for the employer to contribute to the plan.
A common mistake that employers make is incorrectly setting up deferrals on pay codes within their payroll systems or not updating the payroll systems timely when an employee becomes eligible during a plan year. When setting up or administering an employee contribution plan, it is important that an employer read through and understand the plan document and either internally test employee and employer contributions or hire an outside firm to perform specific procedures to identify if there are any errors in these calculations. If the plan is not subject to have an outside audit performed, it is important to have these types of tests and controls in place in order to avoid future liabilities to the employer and possible implications from the DOL or IRS, including possibly jeopardizing the tax exempt status of the plan.
Following these steps will help employers provide the benefits to their employees without causing additional headache, time, or cost to their business.
Kelsa Tinsley, CPA, is an audit manager with Dalby Wendland’s audit team. She joined Dalby Wendland as an intern in 2011 while attending Colorado Mesa University in Grand Junction. After graduating in 2012 with a bachelor of science degree in accounting and a minor in computer information systems, Kelsa joined the firm full time. Kelsa has experience in several industries, including manufacturing, financial institutions, life and health insurance, non-profits, institutions of higher education, and employee benefit plans. Kelsa also assists in preparing business valuations. She is a member of the Colorado Society of CPAs, American Institute of CPAs, and is a board member of the Grand Junction Air Show.
