Avoid common mistakes with defined contribution employee retirement plans

Kelsa Tinsley
Kelsa Tinsley

Many employers offer retirement benefits, including 401k defined contribution plans. It’s important employers know their fiduciary duties and the implications that can occur if a plan isn’t properly administered.

If a plan isn’t administered according to Division of Labor and Internal Revenue Service guidelines or internal plan documents, your plan could be at risk. Employers could be required to pay reimbursements, penalties and interests. Depending on the timing of when errors are corrected, the effects could be substantial.

Many employers hire trustees and advisors to administer plans in accordance with regulations and guidelines. Still, fiduciary duties fall back on the employer. Employers must know their responsibilities as plan sponsors.

The plan adoption agreement, the governing document, constitutes one of the biggest areas of mistakes in administering employee benefit plans. Plans must follow the definitions and elections in the plan adoption agreement. Areas of importance include, but aren’t limited to, employee eligibility, vesting requirements, types of allowed distributions, participant loan policies and the definition of plan compensation.

It’s essential to know the definition of plan compensation. If, for example, compensation is defined as all W-2 wages, depending on the types of compensation the employer offers, this could include fringe benefits, bonus pay and commissions. If deferrals aren’t correctly withheld from these types of wages depending on the employees’ elections, the employer could have to contribute to the employees’ balance for up to 50 percent of the missed employee deferrals as well as 100 percent of missed employer contributions on those wages and lost earnings for the time period the employee would have had these deferrals. It could take significant time and expertise to calculate missed deferrals as well as create a considerable liability for the employer to contribute to the plan.

Employers often incorrectly set up deferrals on pay codes within their payroll systems or don’t update payroll systems in a timely manner when an employee becomes eligible during a plan year. When setting up or administering an employee contribution plan, it’s important an employer read through and understand the plan document and either internally test employee and employer contributions or hire an outside firm to perform specific procedures to identify if there are any errors in these calculations.

If the plan isn’t subject to outside audits, it’s important to have these types of tests and controls in place to avoid future liabilities to the employer and possible problems with the DOL or IRS, including possibly jeopardizing the tax-exempt status of the plan. 

Following these steps will help employers provide retirement benefits to their employees without causing additional time, costs and headaches.