Failure to Maintain Plan Documentation
It is important for plan sponsors to have a general understanding of their fiduciary responsibilities to plan participants. These include making sure to avoid conflicts of interest, diversifying investments, and acting in the best interests of plan participants. However, employers may lack a full understanding of plan specifics, resulting in unintentional mistakes that can lead to IRS or Department of Labor fines and penalties.
There are a number of common operational mistakes made by plan sponsors in administering their retirement plans. Understanding these common pitfalls can help employers avoid costly corrective measures at the hands of federal regulators. Some common mistakes include:
- Failure to Implement a Plan's Automatic Enrollment Provision
- Failure to Timely Transfer Elective Deferrals
- Failure to Track Loan and Hardship Repayments
- Failure to Apply Compensation Definition
- Failure to Maintain Plan Documentation
Failure to Implement a Plan's Automatic Enrollment Provision
Plan documents set forth the eligibility conditions for employees. This includes when an employee becomes eligible for an employer's plan and the employee's enrollment in such plan. However, the employer's human resources department may not have a clear understanding of the retirement plan's eligibility conditions, especially where they diverge from other employee benefit programs. Therefore, employers need to ensure the relevant department understands the importance of making sure eligible employees are notified when the time comes, or automatic enrollment plans are following plan document conditions.
Failure to Timely Transfer Elective Deferrals
Failure to deposit an employee's deferral money is another common mistake in administering a defined contribution plan. To make matters more confusing, there is a lack of a clear bright line rule for when money is to be deposited with the plan provider. Generally, an employer must transfer elective deferrals to the plan on the earliest date the employer can reasonably segregate the deferral from general assets. However, this timeline may be different based on the size of the company and the language of the plan.
Failure to Track Loan and Hardship Repayments
Some retirement plans permit participants to take out loans or receive hardship withdrawals from the participant's account. However, even if permitted, these types of withdrawals may be restricted by plan provisions. In some cases, withdrawals may be taken without meeting the restrictive conditions of the plan. Thus, it is important for employers to fully understand the terms of their plan when it comes to these types of withdrawals. For example, if the plan allows for multiple loans, the employer should ensure the plan administrator tracks the repayment schedules of each individual loan. Furthermore, the plan allows for hardship withdrawals, the employer must ensure hardship withdrawal conditions set forth in the plan document are satisfied.
Failure to Apply Compensation Definition
The definition of “compensation” may have different meanings to an employer, an employee, and the language of the qualified retirement plan. When it comes to plan calculations, employers need to apply the proper compensation definition to avoid possible penalties. However, if an error is made, mistakes in compensation calculations may be remedied by making corrective contributions or submitting to the IRS' voluntary correction procedure.
Failure to Maintain Plan Documentation
Many plan sponsors take for granted that their plan documents contain all the necessary information to comply with ERISA and federal requirements. However, plan information provided by third party administrators may not contain all the necessary information for ERISA compliance. For example, failure to provide a plan participant with a compliant summary plan description (SPD) can result in costly fines and possible criminal penalties.
Suggestions to Avoid Potential Issues
There are a number of ways plan sponsors can reduce their liability and avoid costly penalties for operational errors. These include conducting a complete review of plan documents and company policies to ensure they are in accord. Any potential problem areas should be remedied and steps taken to prevent future errors. Employees and departments at all relevant levels should be made aware of the importance of DOL and IRS compliance.
Another way to reduce potential mistakes is to enlist third-party service providers to manage the plan and take on fiduciary duties. A financial institution may have more experience in plan management than the employer.
If you have any questions about making sure your retirement plan complies with ERISA regulations, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits. Our firm can provide fiduciary counseling, help you avoid ERISA penalties, and represent you in ERISA litigation. Contact our office today with any questions on how we can help you and your business succeed.
