See Also >>> 401k Plan Audits
Ensuring that the company’s 401(k) plan is operating per plan documents and IRS regulations is an essential task that should be undertaken at least annually. Regardless of plan size, there are rules that plan administrators must follow when executing common activities, such as issuing participant loans and remitting employee deferrals. If a plan lacks compliance in any area, it can result in an audit, penalties and other financial issues. To help clients, prospects and others understand if their plan is operationally compliant, Wilson Lewis has provided a summary of key issues to consider below.
Key Plan Compliance Considerations
- Plan Documents – Have plan documents been updated in the last few years? There are several major laws that impact 401(k) plans, including the Small Business Jobs Act of 2010. It’s essential to ensure that the plan is in compliance with these changes.
- Plan Operations – Is the daily operation and maintenance of the plan in compliance with plan terms? A common issue found with many 401(k) plans during an audit is that the plan is not administrated per plan terms, so ensure that all conditions are followed to the letter.
- Employee Participation – Were all eligible employees given the opportunity to participate in the plan and make elective deferrals at the correct point in time – and were non-eligible employees restricted from enrolling? Every 401(k) plan defines the conditions that must be met for participation – typically related to length of employment, type of employment and work hours per week. They also specify enrollment periods, such as the first of the month or the beginning of the quarter after becoming eligible. It is the employer’s responsibility to make plan participation available for (only) eligible employees, enroll them and withhold the proper amounts from their paychecks at the proper time.
- Employee Deferral Deposits – Are employee deferrals being deposited in a timely fashion? A common issue that many plan administrators make is waiting longer than is permitted to make these deposits. The IRS recommends making the deposit as soon as the deferral can be segregated from employer assets but no later than the 15th business day of the following month after deferrals are withheld.
- Employer Matching Contributions – Were employer-matching contributions made to employees’ accounts in accordance with plan terms and conditions? While guidelines will vary from plan to plan, it’s important to be aware of and follow matching contribution terms and timelines closely to avoid a finding during the audit process.
- Participant Loans – Were participant loans made in accordance with plan documents and corresponding IRS regulations? Participant loans need to be carefully managed, and there are a number of strict guidelines that must be followed related to the amount that can be borrowed, how funds are to be withdrawn and loan payback terms. If there is a default or a loan taken outside of regulations, there can be significant tax consequences for the participant and employer.
- Hardship Distributions – Were these distributions made in accordance with plan terms? Hardship deferrals are available with certain plans for situations when a participant has an immediate and heavy financial need. If the distributions were not made in accordance with plan terms, for instance if a hardship withdrawal is taken for a non-qualifying purpose, then there may be significant tax implications for the plan and the participant.
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Managing a 401(k) or other retirement plan can be a challenging task because of the amount of testing and regulations that must be followed and annually reviewed. Catching mistakes in advance of a formal audit will often allow you to correct them with minimal consequences. If you have questions about your 401(k) plan’s operations or need assistance with a 401(k)-plan audit, Wilson Lewis can help. For additional information, please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.