The number of 401(k) plans has grown persistently from around 17,000 covering roughly 7.5 million active participants in 1984 to almost 527,000 plans covering almost 64.5 million active participants in 2013. Assets in 401(k) plans were approximately $4.2 trillion in 2013. With the continually growing popularity of 401(k) plans, it is important for plan sponsors to be aware of common mistakes found during the course of 401(k) plan audits.
Misunderstanding of Eligibility Rules or When Participants Can Enroll
Employee benefit plans clearly define who is eligible and not eligible to enroll and participate in the plan within the body of the Plan Document. Usually there are restrictions based on age of the participant, length of employment for the participant, whether the employee works full time vs.part time, etc. Once an employee is eligible to participate in the plan, there may be restrictions when the participant can actually enroll in the plan, such as July 1st after eligibility has been met. Audits have revealed that Plan Sponsors begin withholding amounts from participant’s paychecks at the date when the participant becomes eligible to participate in the plan instead of waiting for the date when both eligibility and enrollment requirements have been met.
Late Transfer of 401(k) Deferrals
The Department of Labor (DOL) regulations require that employers deposit salary deferrals as of the earliest date on which such amounts can reasonably be segregated from the employer’s general assets. In many cases, amounts can be segregated on the same day the employee’s paycheck is issued. Other rules provide that in no event may salary deferrals be deposited later than the 15th business day, not calendar day, of the month following the month in which such amounts would otherwise have been payable to the participant in cash. The key here is for plan sponsors to be consistent when transferring deferrals on to the custodian. The DOL will consider the routine transfer date, the earliest date amounts can be segregated. If the plan sponsor is inconsistent and transfers deferrals one day after paychecks are issued and, the following week, transfers deferrals three days after paychecks are issued, the DOL will consider the shortest time period demonstrated as the earliest date amounts can be segregated and the Plan Sponsor may be subject to fines for late transfers of 401(k) deferrals.
Failure to Use Correct Compensation
Employee benefit plans typically define what types of compensation are eligible for a deferral percentage to be applied against. Eligible compensation may or may not include all types of W-2 income, such as bonuses, commissions or accrued vacation payouts. Plan sponsors should be aware of the types of eligible compensation as defined by the Plan document and make sure the information is conveyed to the payroll service provider, if applicable.
Other
Audits have revealed various other common mistakes involving 401(K) plan sponsors:
- Lack of proper committee to oversee plan and its investments
- Improper vesting of terminated participants
- Improper use of forfeited amounts
- Improper distributions to participants
If you need further information or assistance with 401(K) plan compliance, feel free to consult us here at Calibre CPA Group, PLLC.
By: Matthew A. Banks | Manager
