It’s that time of the year when most organizations begin thinking about their retirement plan responsibilities, whether it’s non-discrimination testing or preparing to file the Form 5500 with the IRS. This is usually a nerve-wracking time for employers, as there are often concerns about the outcome of the testing. Will we pass our tests? Will we be required to return hard-earned retirement monies to some of our employees? Will we have more serious issues?
At Helios, we see a few common practices that don’t result in good outcomes for testing. Here are the top 5 issues we see, and our recommendation to help mitigate any risks:
Top 5 Problems with Retirement Plan Administration
1. Understanding your plan. There is no question that this is a complex area, and understanding your plan is critical to success in your retirement administration. Much of what is contributed below speaks to this, but we cannot put more emphasis on any specific area than this. An organization’s internal plan administrator has fiduciary responsibility for ensuring that the funds are being handled properly, and can be held personally liable for mismanagement.
RECOMMENDATION: Helios recommends that you thoroughly review your plan document and ensure that you are clear on the organization’s responsibilities to comply with the provisions of the plan. Almost all retirement plan sponsors are issuing compliance calendars and are happy to help you through the process of compliance.
2. Proper and timely auto-enrollment of employees (if your plan calls for it). Automatic enrollment means that an organization has instituted a policy that employees are automatically enrolled in the retirement plan unless they opt out in writing (or in some cases through an online system). Failure to properly auto-enroll employees can result in significant fines if caught during an audit. Ordinarily the process to correct involves contributing ½ of what an employee should have been contributing, plus all of any employer match. These funds come from the organization, not from the employee.
RECOMMENDATION: Helios recommends that you set up a process that permits you to ensure that employees are
notified at the time of hire of the auto-enrollment program and are enrolled timely.
3. Failure to submit deferrals on time. The IRS permits an organization 15 days to get the funds into the retirement plan. However, if it can be established that the funds have been regularly contributed in less time than that, a shorter window can be assigned to your plan.
RECOMMENDATION: We recommend that you establish a standard process of contributing the deferrals and you stick with it. This is one area where ACH deposits are particularly helpful, as it adds speed (and consistency) to the deposit of funds.
4. Notice distribution. There are multiple notices that must go out each year regarding the plan. In addition, employees who reach certain milestones must also receive notices. Some of the notices that are regularly issued are:
- Notice when an employee is hired (the summary plan description, enrollment package, beneficiary designation form and salary deferral election form)
- Notice of automatic enrollment
- Notice of suspension of benefits
- Notice of individual benefits
RECOMMENDATION: Most plan sponsors will provide you with a listing of these notices and notify you when they need to be issued. Helios recommends that you visit the IRS website for a complete listing of notices that must be issued to be compliant.
5. The last one should be obvious to you at this point…it is a failure to establish and follow standard practices that permit you to remain complaint. Documented processes allow anyone who may be looking at the organization’s plan to determine the organization is focused on the steps necessary to properly manage a plan. Auditors like to be able to see that your process is not only formalized, but followed.
RECOMMENDATION: Helios recommends that you establish a fool-proof set of processes in conjunction with your plan sponsor and your auditors to ensure that you are compliant.
Simply put, the biggest areas that need attention are understanding the plan and following the provisions, and document, document, document along the way. Helios also recommends regular audits throughout the year to ensure the funds that are being deferred are being distributed properly. Organizations that are found to be non-compliant in any of these or other areas are subject to significant fines and possibly the loss of the right to offer a retirement plan to their employees.
If you are getting ready to test, good luck! And if you aren’t yet in the testing window, take a look at your plan and processes to ensure you are compliant across the board.