Rarely, if ever, does a person who has been tasked with running a 401(k) plan go into the job with the willful ill intent of corrupting the plan. However, there are certain areas of 401(k) plan management that seem to, time and time again, trip up even the most well-meaning plan sponsors. Here are three areas that can cause trouble:
1. The Plan Document
The plan document serves as the instruction manual for how to operate the 401(k) plan and covers everything from eligibility and enrollment to match formulas and vesting schedules. The area that we have found causes the most problems is the definition of compensation. Most commonly, the plan’s definition will include all W-2 income including bonuses. It is important to note that we have come across plans that do not withhold elective deferrals from bonuses simply because that wasn’t past practice or because no participant had ever asked for that. Too bad neither of those are good enough reasons for the DOL or the IRS if the plan is audited. In order to avoid the potential traps of the plan document, seek the assistance of knowledgeable third party administrators and advisers who can help you identify the details.
2. Employee Contributions
It is common knowledge that if you withhold money from an employee’s paycheck, you need to deposit that money into the area from which it was withheld – whether it be taxes, insurance, or 401(k). The potential trap in remitting 401(k) deferrals lies in the timing of those contributions. Government regulations require that participant contributions to a 401k be deposited to the plan on the earliest date that they can be reasonably segregated from the employer’s general assets. In no event may they be deposited later than the 15th business day of the month, following the month in which the participant contributions were deducted from their pay. Seems pretty straightforward, right? Well, there is a catch. First, you must deposit the deferrals as soon as administratively possible; so, if that means in 2 business days, then they must be deposited in 2 business days. Additionally, you set the standard for your plan. By way of example, if the contributions are withheld every other Friday and are always deposited on the following Wednesday, then you have established your deadline as within 3 business days. However, if you go vacation and the contributions that were withheld on Friday don’t get deposited until the following week’s Monday, then you are outside of your 3-day business standard.
Forfeitures occur when your plan has a vesting schedule in place for employer contributions. If a participant leaves before he or she is fully vested, then the unvested portion of their 401(k) account becomes a forfeiture. Those forfeitures can then be used to pay certain plan related expenses (excluding settlor functions), to reduce employer contributions, to provide additional participant contributions, or to restore previously forfeited participant accounts. The trap with forfeitures comes in the timeliness of use. The IRS requires that forfeitures be used or allocated for the plan year in which they occur or, in certain cases, the following plan year. The plan is not allowed to let the forfeitures grow year after year without using them. Therefore, it is very important that you monitor your forfeiture account and watch how the plan uses it.
If you think that your plan may be vulnerable to falling into one of these traps, please reach out to me at firstname.lastname@example.org and we will work to unset it.
Jamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162