A compliance review will help you catch any plan errors or overlooked updates that might affect the retirement income of one or more of your company’s employees or subject your company to regulatory penalties. Here’s a quick run-down of how to check under the hood of your organization’s 401(k) plan:
- Laws related to retirement plans change quite frequently, and the IRS generally establishes firm deadlines for adopting these changes. Update your calendar tickler to remind you when amendments must be completed. Maintain regular contact with the company that sold you the plan to ensure you’re getting the latest updates.
- Perform a review of compensation definitions and provide training for the person or people in charge of determining employee/participant compensation. This will help you make sure your plan’s definitions of compensation are correct for deferrals and allocations.
- To ensure you make employer matching contributions correctly for all eligible employees, review your plan document to determine the correct matching contribution formula and compare that to what’s being used. Ensure that your plan administrator has adequate and sufficient employment and payroll records to make the calculations.
- Initiate an independent review to determine if highly compensated and non-highly compensated employees are properly classified. This will help you satisfy the actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination tests.
- Review payroll records to extract the total number of employees, birth dates, hire dates, hours worked and other pertinent information to ensure all eligible employees identified are given the opportunity to make an elective deferral. Also inspect W-2 and state unemployment tax documents to see if employee counts are accurate. If an employee was not provided the opportunity to make an elective deferral, make a qualified non-elective contribution (QNEC) to the plan on the employee’s behalf.
- Provide your plan administrator with sufficient payroll information and inspect deferral amounts for plan participants to make sure elective deferral distributions do not exceed amounts allowed under IRC section 402(g) for the calendar year ($18,000 in 2015 and 2016, plus an additional $6,000 if the employee is age 50 or older).
- To ensure timely deposits of employee elective deferrals, coordinate closely with your payroll provider to determine the earliest date the deferral deposits can reasonably be segregated from general assets, then set up procedures to ensure deposits are made by that date.
- If your 401(k) plan is determined to be “top-heavy,” make employer contributions of up to three percent on behalf of all non-key employees still employed on the last day of the plan year. A plan is top-heavy when, as of the last day of the preceding plan year, the aggregate value of the plan accounts of key employees exceeds 60 percent of the aggregate value of the plan accounts for all employees under the plan.
- Reacquaint yourself and plan administrators with hardship provisions designed to help employees who are facing immediate or heavy financial need. Share information between plan administrators and payroll offices regarding hardship distributions made from the plan.
- Ensure timely filing of Form 5500 (Annual Return/Report of Employee Benefit Plan) ERISA, and Summary Annual Report (SAR) to all plan participants annually. Don’t assume someone else is filing these forms. Each plan may have a number of individuals providing service to the plan, including your CPA, the TPA, benefits attorney, auditor, inside auditor, human resource employees, banker, and financial advisor. The plan administrator should have the responsibility for making certain the return is properly filed.
Finally, if you have any questions or concerns, opt for an independent review of your plan administration. Then develop communications protocols to make all relevant parties aware of changes on a timely and accurate basis.