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A Compliance Guide for Retirement Plan Administrators

The number of retirement plan compliance audits conducted by the Department of Labor (DOL) and the Internal Revenue Service (IRS) has increased in recent years and all indications point to this trend continuing. By properly maintaining, understanding and following plan documents, plan administrators can minimize or eliminate risk should their plan be audited.

Below are the important documents to have on file, how to avoid mistakes by understanding them, when not to rely on your third-party administrator (TPA) and where to turn with questions.

The Risk

According to the most recent statistics provided by the DOL, there are in excess of 650,000 defined contribution retirement plans in the U.S., of which 80 percent are 401(k) plans. The DOL’s Employee Benefits Security Administration (EBSA) is charged with assuring that all 401(k) plans are in compliance with the Employee Retirement Income Security Act (ERISA).

In approximately three out of four plans audited by EBSA, an ERISA violation was detected relating to the interpretation of the plan document or plan operation. ERISA violations can lead to significant fines against the plan sponsor.

Many small and mid-sized companies, with 250 or fewer employees, offer a 401(k) plan for their employees but often are unaware of the complex requirements and responsibilities for administering the plan. The smaller the company, the more likely the plan administrator will be an accounting professional or HR generalist, fulfilling the role that would typically be performed by a retirement benefits specialist in a larger company.

Review Key Documents

To operate in accordance with ERISA and avoid trouble, the plan administrator should ensure that signed copies of the following documents are maintained, reviewed and retained each year.

  • The most recent plan document, including updated adoption agreements for master, prototype and volume-submitter plans.
  • Any plan amendments, including those required due to changes in ERISA.
  • The most recent service agreements with all TPAs.

Depending on the type of plan document adopted, the administrator should retain a copy of the most current IRS determination letter for individually designed plans, an IRS opinion letter for master and prototype plans, or an IRS advisory letter for volume-submitter plans. Determination letters are applied for on a five-year remedial amendment cycle and opinion and advisory letters are applied for on a six-year remedial amendment cycle.

Avoid Common Mistakes

Most importantly, the plan administrator needs to read and understand the plan's provisions to make certain that the plan operates in compliance with them. The following are common mistakes that can be avoided by understanding the plan document:

  • Inadvertently excluding eligible employees from participating.The plan document will define eligibility including age requirements, service requirements (months, hours), employee classification (full-time, part-time, interns, contract labor, etc.) and entry dates.
  • Using ineligible compensation to determine participants’ deferrals. The plan document will indicate the sources of compensation (gross compensation, W-2 compensation, bonuses, severance pay, taxable fringe benefits, etc.) to be included or excluded from calculating participant deferrals.
  • Inadvertently including or excluding employees from employer contributions.The plan document will define the nature of employer contributions (matching, profit sharing, safe-harbor matching, discretionary matching or profit-sharing, etc.) as well as the eligibility requirements and formula for the contribution. Be aware that the eligibility requirements for employer contributions will often differ from those pertaining to employee contributions.

When Not to Rely on Your TPA

Another area that can lead to compliance issues is a misunderstanding of the TPA's duties. Often, the plan administrator will rely on the TPA to perform certain plan functions that are ultimately the administrator’s responsibility.

To avoid potential errors, retain a signed copy of the most recent service agreements with all TPAs, read the service agreements to make certain the services being provided by the TPA are understood, and avoid the following potential mistakes:

  • Vesting calculations and census data. Vesting calculations related to employer contributions for participant distributions are often calculated by the TPA based on the workforce information provided to them. However, many service agreements indicate that the plan administrator is responsible for the proper calculation. Anytime a participant is forfeiting employer funds, a recommended best practice is for the plan administrator to review the calculation.

    The participant’s years of service should be verified with the company’s HR records and the vesting calculation should be verified with the vesting schedules provided in the plan document. Ensure that inaccurate or incomplete data is not retained by the TPA to avoid future errors in the vesting calculation.

  • Approving participant loans and distributions. The responsibility for approval of participant loans and distributions should be indicated in the service agreement with the TPA. As participants have more web-based access to their 401k accounts, requests for loans and distributions are often initiated by the participant on a secure TPA website. TPAs will then process the loan or distribution based on the most current information made available to them.

    The plan administrator is often responsible for the approval of the loan or distribution but may assume the TPA provided approval by processing the request. The plan administrator should review and approve all participant loans and distributions to ensure that the withdrawal is in compliance with the plan document and IRS regulations.

    Obtaining supporting documents for “hardship” distributions, verifying participant’s age for “in-service” distributions or verifying the participant’s loan request does not exceed 50 percent of their vested balance are a few of the requirements to review before approving.

Where to Turn to with Questions

For plan administrators who are not retirement specialists, there are multiple resources that can be used to ensure proper plan operation.

  • The service professionals employed by the plans’ TPAs can usually answer many of the plan administrators’ questions.

  • For large plans with 100 or more eligible participants, the plan requires an annual independent audit from a third-party CPA firm. This audit is included with the annual Form 5500 filing with the IRS.

  • When necessary, an attorney who specializes in ERISA counsel can be engaged to help navigate the complexities of ERISA.

Plan administrators are entrusted with the responsibility of ensuring the plan complies with ERISA. Compliance begins with obtaining and understanding the necessary documents that govern the administration of the plan. Documenting and following a set of processes is key to operating in accordance with the plan document and ERISA.

Jay Kessler, CPA, is co-managing partner at Massachusetts-based Samet & Company PC. He has over 20 years of experience in the employee benefits area and is a member of the American Institute of CPAs' Employee Benefits Tax Technical Resource Panel. ​


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