In 2021, the Employee Benefits Security Administration (EBSA) collected $1.9 billion in qualified retirement plan violations and other enforcement actions. (1) As such, it’s more important than ever that plan sponsors are up to date on plan requirements and avoid costly mistakes.
In our first article, we talked about the top three investment mistakes that retirement plan sponsors often make. In this article, we’ll continue the conversation with the biggest plan administration and operation mistakes and what you can do to avoid them.
1. Not Choosing the Best Plan Design to Meet Your Objective
Choosing the right plan for your business is one of the toughest decisions retirement plan sponsors have to make. Because of this, it’s one of the biggest areas where we see clients consistently make mistakes. You may feel rushed into making a decision because either you or your employees want a plan sooner rather than later, but taking your time to ensure you choose a plan design that meets your objective is the best thing you can do.
In choosing a plan, you will have to navigate questions around the following:
- Employer vs. employee benefits: Who is your target participant? Do you want to include all employees or only upper management?
- Defined benefit vs. defined contribution: What type of benefits can you afford to provide?
- Tax-deduction vehicles: There are options to skew deductions to benefit owners, executives, and key employees.
- Attract, reward, retain employees: How can you best balance the needs of the company with the desire to provide competitive benefits to your employees?
Designing the right plan is an essential part of setting yourself up for success. The last thing you want is to make a hasty decision that leaves you committed to employee contributions you can’t afford, or struggling to maintain compliance because the design is so complicated.
Avoid this issue by doing your due diligence up front and choosing a plan design that meets your long-term objective. Working with a qualified plan advisor can be a great place to start.
2. Misunderstanding Employee Eligibility
One of the biggest mistakes we see with retirement plan sponsors is misunderstanding which employees are eligible to participate in the plan and when. This can be a big issue when it comes to maintaining ERISA compliance since plans have to cover a certain number of non-highly compensated employees to be considered nondiscriminatory and avoid penalties.
As a plan sponsor, you are probably familiar with the rule that states most employees become eligible to participate in a qualified retirement plan after reaching age 21 and working for at least one year (1,000 hours). (2)
But were you aware of the legislative change that significantly updated plan eligibility requirements in 2019? The SECURE Act now requires that long-term part-time employees, those who work between 500-999 hours in the last three consecutive years, be eligible to contribute to a qualified plan. As of January 2021, plan sponsors are required to track part-time employees’ hours to ensure all eligibility requirements are met. (3)
A good way to avoid this mistake is to consult your plan documents when making decisions about employee eligibility, especially as it relates to different types of plan contributions. For instance, long-term part-time employees are generally only eligible for participant deferrals but not employer contributions. (4) Be sure to take these requirements into consideration when determining eligibility.
3. Not Following the Plan Document Compensation Definitions
Another common mistake comes from misinterpreting the compensation definitions, which in turn can cause mistakes in how much (or how little) is allowed to be contributed by the employer or the employee. For instance, in reading the plan documents, you may find that eligible employees are allowed to defer up to 10% of their compensation annually. But what does compensation mean in this instance? Does it include bonuses? Stipends? Overtime? Commissions?
Most commonly, compensation consists of three types of income:
- Wages and salaries
- Payments for professional services
- Payments for personal services (tips, commissions, fringe benefits, etc.)
Put simply, you cannot rely on what you think the word “compensation” means. Instead, you must thoroughly review and understand your plan’s definition of compensation as well as what type of compensation each employee receives.
4. Inconsistent Remittances of Employee Deferrals
Like most aspects of a qualified plan, there are many rules and regulations regarding how and when employee deferrals should be deposited into the plan’s trust account. Plans with fewer than 100 participants have seven days to make the remittance, while large plans are expected to deposit the funds as soon as possible after payroll (typically within two days).
Due to the different timelines for remittance, many plan sponsors don’t realize the importance of consistent employee deposits. Whichever remittance time frame applies to your plan, it’s critical that the same turnaround time is used consistently for every deferral. Taking seven days to deposit some employee deferrals but only one day for others is the quickest way to be flagged by the DOL for an audit. It may not even be a large amount of money in question, but if you’re ordered to correct the mistake, it could result in fines, penalties, and manpower that significantly increases the cost.
It’s crucial to coordinate employee deferrals with both payroll personnel and plan sponsors to ensure remittances are both timely and compliant.
Protect Your Plan From These Mistakes
Don’t let the IRS or DOL find your plan noncompliant! At DCS Pensionmark, we have over 30 years of experience helping clients navigate the retirement plan sponsorship process. If you’re a plan sponsor with questions about your responsibilities, email me at firstname.lastname@example.org to learn more about how we can help.
Dan Shapiro is a retirement plan advisor and holds the Accredited Investment Fiduciary® and Certified Plan Fiduciary Advisor certifications. With over 30 years of experience in the industry, Dan guides his clients through the entire retirement plan process, from plan design to compliance to investment oversight. His goal is to provide his plan sponsor clients with the ability to offer the right retirement plan the right way to their employees—a plan they can be proud of. He is one of the original 100 Accredited Investment Fiduciary® practitioners in the United States and uses his knowledge and experience to implement best fiduciary practices to ensure employees have appropriate investments to choose from and employers have a well-documented fiduciary process in place to mitigate risk. Dan is known for taking the time to understand his clients’ unique goals and situations and applying his holistic approach to customize and develop tailored strategies to improve outcomes and take some of the plan sponsor burden off their shoulders.
When he’s not working, you can find Dan at the park and marina near his house training his Australian Shepherd. He cherishes his frequent FaceTime calls with his grown children who live in Israel. In fact, Dan and his wife, Rita, consider their proudest life achievement to be raising their two children, Ashley and Joshua, to be productive and principled adults. Dan and Rita love to entertain, especially when it includes making great food with the smoker and barbeque. To learn more about Dan, connect with him on LinkedIn.
Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).
(1) U.S. Department of Labor. (2021, October 14). EBSA Restores Over $2.4 Billion to Employee Benefit Plans, Participants and Beneficiaries. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results.pdf
(2) IRS.gov. (2021, June). Retirement Topics – Vesting | Internal Revenue Service (irs.gov)
(3, 4) Congress.gov. (2022, March 30). H.R. 2954. https://www.congress.gov/bill/117th-congress/house-bill/2954/text