The rules and regulations governing employee benefit plans are increasingly more complex. At the same time, enforcement has become more stringent, placing additional burden on the plan administrator. Errors, omissions, and timing mistakes in administering your employee benefit plan can result in significant penalties.
There is often a misconception regarding who is responsible for the plan. Although certain tasks and functions may be delegated or outsourced to third parties, the plan administrator is ultimately responsible for maintaining the plan’s qualified tax status and its compliance with the plan provisions, the Employee Retirement Income Security Act of 1974 and Internal Revenue Service rules and regulations.
Aside from excessive or hidden fees, prohibited transactions or conflicts of interest that can be a red flag for the Department of Labor or IRS, there are a few other issues of which plan sponsors should be aware.
Following is a list of the 10 most common mistakes identified during employee benefit plan audits.
1. Failure to follow the plan document
Although every plan has a plan document, each may be significantly different. Among many other provisions, the plan document will specify eligibility provisions and plan entry dates, vesting, employee deferral and employer matching provisions. Noncompliance with the plan document is an operational defect that can result in plan disqualification.
2. Use of an incorrect definition of compensation
The plan document specifies which earnings are considered compensation under the plan. For instance, plans may exclude certain types of income, such as overtime, bonuses, stock-based compensation and taxable fringe benefits. Other plans may include all wages that appear in Box 1 of Form W-2 as compensation. The cost of failing to follow an employee’s election to withhold, which is not uncommon with bonuses, may be substantial, especially if it is not discovered in a timely manner and impacts multiple years.
3. Late remittance of employee deferrals
DOL enforcement provisions require plan sponsors to deposit monies withheld from employees’ paychecks into the plan at the earliest date the employer can segregate the amounts from its general assets. The cost to correct this error will typically be significantly less than the time required to do so.
4. Failure to adopt plan amendments in a timely manner in order to comply with laws and regulations
As Congress passes new laws, sponsors are given a certain amount of time to adopt plan amendments. Plan sponsors that fail to keep their plan documents signed and up to date may be fined.
5. Improper or lack of use of forfeitures
IRS regulations require that forfeitures must be used or allocated in the plan year incurred. Typical provisions include reducing future employer contributions, payment of plan administrative expenses or allocation to remaining participant accounts. The IRS does not permit forfeiture suspense accounts to hold unallocated monies beyond the year in which the forfeitures occurred.
6. Failure to maintain written deferral election forms
Whether or not a participant elects to participate in the plan, he or she should sign a completed election form.
Such forms should be maintained for all eligible employees, and revised signed election forms should be obtained for any subsequent changes.
7. Improper application of eligibility provision
The plan document may provide different eligibility provisions for deferrals and employer contributions.
These may include time requirements (e.g., three months of service), hour requirements (1,000 hours) or a combination of the two. Excluding eligible employees’ participation in the plan is just as much of a problem as allowing ineligible employees to participate in the plan.
8. Incomplete or inaccurate census information
For a defined benefit plan, the actuary relies on an accurate census in order to calculate the company’s required contribution.
Incomplete (active participants are omitted) or inaccurate (incorrect hire or birth dates) information may result in significantly different amounts.
9. Improper handling of hardship withdrawals
Proper documentation is required for hardship withdrawals to ensure such distributions are provided in accordance with IRS rules and the plan document. After a hardship withdrawal, employee deferrals should be suspended for six months.
10. Inadequate fidelity bond
ERISA bonding requirements are intended to protect the plan from risk of loss due to fraud or dishonesty on the part of people who handle its funds. The minimum amount of the bond must be equal to at least 10 percent of the amount of funds managed or handled by the fiduciary, subject to a maximum of $500,000.
With the countless responsibilities that management must handle, it is possible for operational errors in administering the employee benefit plan to occur. While both the IRS and DOL have programs in place to correct the errors, it is critical for companies to have expert legal and accounting professionals to help through the process.
Mark G. Metzler can be reached at 215-441-4600, or Email.