Retirement plans are a valuable benefit for a company’s employees and a great way to enhance a total employee-compensation package. However, correctly maintaining a retirement plan comes with specific responsibilities and certain administrative duties to ensure compliance with all the laws and regulations that govern employee-benefit plans. The size of the plan does not matter. In each case, there are complex procedures and rules that must be observed or risk facing potential penalties. Below are three common examples of errors found within plans that can be easily mitigated with proper knowledge and strong internal controls within the plan structure.
Definition of compensation: Eligible compensation should be clearly defined in the plan documents. In addition, this definition should cover all types of contributions to the plan, including employee elective deferrals, and any employer contribution such as matching or profit sharing. There are many occasions when plans will have different definitions of compensation for each type of contribution. For example, compensation for salary deferrals may include all compensation, while the calculation for employer profit sharing may exclude certain compensation such as overtime, bonuses, or commissions. A good recommendation for plan sponsors is to understand the definition of compensation as noted in the plan documents, review the plans calculation of eligible wages, and periodically spot check the calculation to ensure the proper amount of wages is being used.
Plan minutes: With the complexities of benefit plans and the recent focus on fiduciary responsibility in overseeing these plans, it’s important that the plan trustees adequately document the due diligence they exercise over the operations of the plan. The trustees should meet at least annually to review such items as investment returns, determining investment strategies, monitoring tax and qualification compliance, review of third-party services, and approval of any plan amendments. In addition, if your plan has any discretionary contribution feature, such as employer matching or profit sharing, it’s highly recommended that these amounts are documented on an annual basis and retained within the plan records.
Hardship distributions: Many plans offer a hardship-withdrawal feature to their plan participants for times when it is necessary to satisfy an immediate and heavy financial need. In order for a hardship to be approved, the plan administrator is required to review and obtain documentation to verify the participant’s financial need. This approval and documentation must be retained within the plan records. In addition, plans typically require participants to stop making contributions for the next six months after receiving a hardship distribution. This can be easily missed if there are not strong controls in place and proper communication between the plan administration and the payroll function.
Early detection is critical
It’s prudent that if you uncover an error within your plan, you act quickly. The earlier an error is detected, the easier and less expensive it will be to fix. As soon as an error is discovered, contact your third-party administrator and your legal counsel to determine the appropriate correction.ν
Todd Klaben, CPA is a partner with The Bonadio Group, in the accounting firm’s Syracuse office and its Small Business Advisory division. Contact him at firstname.lastname@example.org