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Staying in compliance with 401(k) plan requirements is an important part of safeguarding your employees’ financial future and protecting your company from legal repercussions. By understanding the areas where you are most likely to fall out of compliance, you can address problems before they escalate into costly fines, penalties or lawsuits.

Here, we look at some of the most common 401(k) compliance issues, along with steps you can take to avoid them.

Five most common 401(k) compliance issues

1.) Timely remittance of employee contributions.

The Department of Labor (DOL) mandates that employers deposit employee contributions into defined contribution retirement plans in a timely manner. Small plans (those with fewer than 120 eligible participants), have up to seven business days but should ideally make their contributions within two to three business days. Contributions for large plans must be segregated from the employer’s assets as soon as administratively feasible but in no event later than the 15th business day after the month’s end in which the deductions from employees have been taken.

The “15th business day” guidance is not a safe harbor for depositing deferrals, and in most cases, the DOL would expect deposits to occur much more quickly than that. The DOL will look at how soon companies can segregate other payroll-related items from the company’s assets, such as withholding taxes, and will likely hold companies to that timetable for segregating employee 401(k) deferrals as well.

2.) Non-discrimination testing (NDT).

As tax-favored plans, 401(k) plans should benefit all participants. The IRS mandates that retirement plans conduct non-discrimination testing every year to ensure that plans are not favoring highly compensated participants. Companies that fail a non-discrimination test have a set amount of time to fix any failures of the NDTs. If failures are not corrected in a timely manner, retirement plans may face potential disqualification of the plan.

3.) Late filings.

Companies that miss the deadline for submitting Form 5500 may incur fines and penalties. To mitigate this, plan administrators can take advantage of the DOL’s Delinquent Filers Voluntary Compliance Program (DFVCP), so long as they do so before receiving a notice from the DOL. When a plan is delinquent, the DFVCP allows for voluntary compliance with the annual reporting obligations mandated by the Employee Retirement Income Security Act (ERISA) at reduced costs to the plan sponsor. Additionally, the DOL provides an online calculator to help determine the exact penalties due.

4.) Non-compliance with the plan document.

A plan’s operations, its plan document and its summary plan description must be aligned. This ensures a correct and consistent definition of eligible compensation; the inclusion of eligible employees and the exclusion of ineligible employees; and the proper administration of loans, rollovers and distributions. A plan sponsor that fails to adhere to the plan’s provisions risks breaking their fiduciary responsibility, which could lead to the disqualification of the plan’s tax-favored status, and the imposition of penalties and liabilities.

Companies realizing that a plan has not been operating in compliance with the plan document must make a good-faith effort to correct the issue(s) and involve an ERISA attorney in the correction process.

5.) Participant loans.

Some plans permit participants to take loans from their retirement accounts. In order to qualify, these loans must meet certain requirements for amount, duration and repayment. There are also requirements for loans made to owners and officers of the employer, which, if not met, may cause the loan to be considered a prohibited transaction. If loans don’t conform, the plan is generally considered to be out of compliance, and the amount of the loan may be taxable to the participant.

This can happen when, for example, an employee agrees to have repayments taken out of their paychecks, but the loan is not communicated properly to payroll, and repayments are not made as scheduled. While corrective actions can be taken for such issues, they are limited. Effective communication between relevant departments is essential for preventing these issues.

How to maintain compliance

Some basic safeguards can help you avoid 401(k) compliance issues altogether. Regardless of plan size, industry or experience, we recommend the following for all companies with a retirement plan:

  • Work with knowledgeable service providers with expertise in retirement plans, including third-party administrators, retirement plan advisors and auditors.
  • Designate one or more people internally, typically from finance or human resources, to monitor changes that may affect the plan.
  • Have a process in place that enables employees who spot a problem to report it effectively.
  • Do not ignore problems! Take steps to address them as soon as they become apparent.

How BPM can help you stay compliant

Failure to stay in compliance can be costly in both money and time. At BPM, we want to help save you both, which is why we do more than simply audit your plan. We’ll meet with you, educate you about your options and responsibilities, and make recommendations for service providers who are right for your needs. If you are facing 401(k) compliance issues, have questions or would like to discuss an upcoming audit, please contact us.


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