Five Common Mistakes Made By Retirement Plan Sponsors

More than ever before, liabilities and regulations are becoming almost overwhelming for 401(k) Plan Sponsors.  Changes in the tax laws, new IRS rules, fiduciary responsibilities, as well as ever-increasing government regulations mean that, occasionally, a 401(k) plan sponsor might make some mistakes.  The problem, of course, is that these mistakes can cost your company, and your employee’s money, as well as causing major headaches.  Below are the Top 5 potential pitfalls you need to be aware of, so that it doesn’t happen at your place of business.

 Mistake #1: Failure to Effect Employee Deferral Elections

A relatively common error, a missed deferral opportunity is when a plan’s sponsor does not process an employee’s elective deferral. What happens next is that said employee receives taxable compensation that should have instead been contributed to their plan, and so they miss out on the a pre-tax contribution and tax deferred earnings they should have received. The employee could also be missing out on an employer match if the plan offers a matching contribution. The rules have recently been somewhat simplified to correct a missed employee election, but is best not to let this happen in the first place.

 Mistake #2: Excess Deferrals

The IRS sets elective deferral limits that can be made each year to qualified and non-qualified plans.  This includes 401(k)’s, SIMPLE 401(k)’s and 403(b) plans and SIMPLE IRAs. The problem; making deferrals in excess of legal limits is a big no-no, but a mistake that many plan sponsors routinely make.  Most of the time the plan sponsor is not to blame. The mistake happens when a new employee transfers from one division in the company to another or the employee joins your company and has previously made contributions to his/her former 401k plan and is not aware that the deferral limitations apply to them as a person for the entire calendar year.  An Excess Deferral that is not corrected timely can cause ‘double taxation’ of those amounts to the participant.

 Mistake #3: Failure To Use The Correct Definition Of Compensation

Every qualified plan will define what compensation is for a participant. The definition of compensation plays a vital role in regards to annual compliance testing and the calculation of employer contributions.  Some plans may also limit what an employee can defer as a percentage of compensation. It is extremely important to understand and use the correct definition of your plan’s compensation.  I often recommend plan sponsor’s do an annual review of this plan definition.

 Mistake #4: Correction for Exclusion of Employees for Elective Contributions or After-Tax Employee Contributions

The problem here is one of exclusion, caused when an employee who qualifies for a specific plan doesn’t take advantage of said plan because the plan’s sponsor doesn’t correctly notify what, when, and how they become eligible to be a participant.  This can, in a worst-case scenario, cause that plan to become disqualified, a huge problem not only for every employee of that company but also for the company itself. For the employee, the loss of an opportunity to put money into a tax-favored plan can mean the loss of future income.  There could also be a lost opportunity of a company match if offered.

 Mistake #5: Failure to Update a Plan

Another common plan sponsor mistakes is simply not to timely update their plan on a regular basis.  As we mentioned earlier, 401(k) (and other plan) rules, regulations and requirements are constantly changing.  If a plan’s sponsor does not keep up with those changes, and implement them into their plan, that can spell big financial problems all-around, including the loss of qualified status. Every qualified plan is required to be restated every five to six years.  This is commonly known as a plan restatement.  The plan is restated to account for all current and past regulations that have gone into effect since the prior plan restatement.

 

- Robert J. Alexander

Mr. Alexander is a Pension Consultant for Wellington Retirement Solutions, Inc. with over 10 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

Add comment