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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.
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.
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:
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:
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.
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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