As beneficial as it may be to you and your employees, sponsoring a tax-qualified retirement plan is not without its risks.  The rules can be complex and ever-changing, and the IRS and Department of Labor (DOL) will not hesitate to come down hard on plan sponsors who do not comply, whether it is intentional or unintentional. 

Penalties for noncompliance can be severe and can even result in the loss of a plan’s tax-qualified status.

Common Mistakes

There are a number of common mistakes plan sponsors make that can cause them to run afoul of IRS regulations. Consider these typical compliance errors:

• Not following the terms of the plan document– The plan document, which must comply with the Internal Revenue Code (IRC), is the overriding document that drives how a plan is administered and what the plan and its participants can and cannot do. For instance, eligible compensation may include or exclude an employee’s bonus and this will have to be defined in the plan agreement. Calculating an employee’s deferral or an employer match using compensation amounts that are not consistent with how they are defined in the plan document will cause compliance issues.

• Incorrectly including or excluding plan participants – For 401(k) plans, minimum service requirements may be established to determine eligibility for an employee to participate. These requirements must be specifically defined in the plan document and are usually based on the length of service or hours worked during the plan year.

• Not remitting employees’ contributions in a timely manner – All participant contributions must be remitted to the retirement plan as soon as it is administratively feasible. In no case can this be later than the 15th business day following the end of the month in which amounts are contributed by employees or withheld from their wages. For many plans, this could be as little as a couple of days. It should be noted that a safe harbor provision is in place for small retirement plans, which are defined as plans with fewer than 100 eligible participants on the first day of the plan year. For these plans, employee contributions and loan payments are considered to be timely if they are deposited to the plan no later than the seventh business day following the pay date.

Filing Requirements

In general, all defined benefit and defined contribution plans require that the plan sponsor file Form 5500 in accordance with the requirements of the IRS and DOL. The filing due date is the last day of the seventh month after the plan year ends. Extensions may be obtained to extend the due date by 2 1/2 months. In addition, Federal law generally requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file Form 5500.  If your employee benefit plan is required to have an audit, one of the most important duties of the plan administrator is to hire an independent qualified certified public accountant.

The Buck Stops Here

Many plan sponsors choose not to go it alone, instead relying on a number of outside service providers to maintain the plan. Unfortunately, outsourcing the operation of your retirement plan does not relieve your organization of liability for noncompliance.

If your company’s retirement plan requires an audit and you want to learn more about our services, please contact M. Douglas Fay at 401-752-0507.