Here is a quick list of mistakes that employers make on their 401k plans.
COMMON COMPLIANCE ERRORS
This list, along with more detailed information on examination trends located on the IRS website can be used by plan sponsors to identify compliance risks in their own plans.
- Missing plan document amendments
- Not using the plan’s definition of compensation
- Excluding eligible employees
- Violating the plan’s loan provisions
- Exceeding annual contribution limits
- Failing nondiscrimination tests
- Not making the required contribution in a top-heavy plan
- Not following the plan’s formula for allocating plan contributions
- Impermissible in-service or hardship distributions
- Not making required minimum distributions (RMDs)
Another project that plan sponsors should anticipate in the coming months is further analysis and follow-up on the 401(k) Compliance Project conducted by the Employee Plans Compliance Unit. Initially launched in May 2010, this project required 1,200 randomly selected 401(k) plans to complete a lengthy questionnaire. The IRS is using the responses to gauge the overall compliance level in 401(k) plans and identify ways in which it can best use its resources to provide additional support and improve compliance.
In early 2012, the IRS published an interim report summarizing findings from the questionnaire responses. A copy of the interim report is available at www. irs.gov/Retirement-Plans/401(k)- Compliance-Check-Questionnaire- Interim-Report. The IRS will continue to analyze the data received as part of this project and will release a final report that can be used by plan sponsors to help identify and prevent common 401(k) plan compliance mistakes. The IRS has made it clear that overall plan compliance will continue to be a priority and encourages plan sponsors to use the original 401(k) questionnaire —available at http://www.irs.gov/pub/irs-tege/epcu_401k_ questionnaire.pdf — as an internal control tool for evaluating their own plan.
Another ongoing IRS enforcement initiative is the Learn, Educate, Self-Correct, and Enforce (LESE) examination project. The IRS uses the LESE examinations to assess compliance levels for randomly selected retirement plans with similar characteristics that they believe may reveal common problems. Examples of recent LESE examinations include topheavy 401(k) plans that failed to make the required contribution and plans that exceeded the annual additions limit.
Given the success of these targeted examinations, they will likely continue as part of the IRS’s enforcement initiatives. Plan sponsors who regularly self-audit their plans and use IRS outreach programs to keep their plans on course can avoid or reduce potential penalties for noncompliance. The IRS has developed self-audit and self-correction tools to aid in plan sponsors’ voluntary compliance efforts.
The DOL, through its Employee Benefits Security Administration, is responsible for enforcing the fiduciary rules and participant protections set forth in the Employee Retirement Income Security Act of 1974 (ERISA). Under its authority to both issue regulatory guidance and enforce these rules, the DOL has been extremely active. Examples of current projects include the fee transparency rules that became effective during 2012 and ongoing efforts to ensure timely deposits of employee contributions.
Plan sponsors have undoubtedly spent a great deal of time over the past year interpreting and complying with the DOL’s fee disclosure requirements. It is not unreasonable to think that compliance with these new rules will be a DOL audit and enforcement focus over the next few years.
Plan sponsors should assess their current process for collecting and analyzing the required service provider information to ensure they can withstand DOL scrutiny. Plan sponsors may find it helpful to work with their plan advisors to ensure they have properly identified all covered service providers who should be providing fee disclosure notices—and ensure they are using an appropriate, disciplined process for reviewing the information. Plan sponsors should also ensure that all participant fee disclosures contain the required information and will be delivered in a timely manner. As with other fiduciary functions, plan sponsors should maintain records of the steps taken to satisfy their responsibilities under the fee disclosure regulations.
Plan sponsors may also find it helpful to tap into some of the support materials developed by the DOL and others to help them understand and comply with the new service provider fee disclosure requirements. A few specific resources from the DOL include:
- Understanding Your Retirement Plan Fees —www.dol.gov/ebsa/publications/understandingretirementfees.html
- Getting It Right: Tips for Selecting and Monitoring Service Providers for Your Employee Benefit Plan — www.dol.gov/ebsa/pdf/fs052505.pdf