Heightened Scrutiny: Retirement Plans



Regulatory compliance for retirement plans requires vigilance with the policies and proceedings of both the Internal Revenue Service and the Department of Labor. Experts observe that both have ratcheted up their scrutiny of retirement plans. Accordingly, sponsors are urged to identify areas of error and proactively make corrections.


Penalties For Noncompliance

Attorneys at Fox Rothschild remind us that when plan audits reveal areas of noncompliance, the penalties for employers are substantial, and encourage plan sponsors to avoid these common compliance challenges:


Major compliance risks stem from the failure to recognize plan document defects, which is one of many areas of focus during an IRS audit of a retirement plan. In addition, the DOL has focused, and continues to focus, on timely deposits of employee deferral contributions–so much so, that some employers deposit the deferral contributions before paychecks are issued.

Compliance risks include, among others, failing to notify and pay terminated employees, not updating plans with the latest ERISA requirements, and using improper amounts to determine employee compensation. Companies risk exposure to government penalties and sanctions, such as the disallowance of employer contributions and plan disqualification.


Attracting Attention

Accounting specialists at Hanson & Co also urge diligence, especially related to  regularly and promptly making the allocated deferrals to the retirement accounts of employees, noting:


Plan sponsors need to establish a consistent timeframe in which they make participants deferral deposits into retirement accounts. When reviewing plans the IRS and DOL look for patterns for how long it takes to deposit deferrals. If in one month it took the plan sponsor two (2) days to make the deposit, but suddenly it changes to one week, a compliance issue could arise. The key is to be as regulated and consistent as possible when executing participant deferrals. This will ensure deferrals are not considered late which could trigger a series of other undesirable issues.


Another common compliance error is failure to adhere to the eligibility requirements for participation in the 401k plan. Experts  remind plan sponsors that mistakes related to faulty application of the plan’s criteria for eligibility require attention, optimally before they are caught by regulators:


Plans have clear definition of which employees are eligible to participate and which are not.…Allowing employees to participate in the plan when they are not eligible can create serious issues. To resolve a situation where an employee who met eligibility requirements to participate but was not granted access can be time consuming. In this situation, the company is required to make up for missed contribution opportunities and to ensure lost earnings on the contributions is also repaid. Resolving these errors can be costly and time consuming.


Rather then wait for scrutiny from the IRS and DOL, plan sponsors can be proactive in their efforts to identify and correct errors made in administering retirement plans. In fact, annual assessment is a best practice. . As Genelle Brakefield, a leader at Ekon Benefits reminds us:  “If you don’t look, you don’t know what’s going on….The nice part about doing these assessments frequently is that the faster you can identify a problem, the faster you can fix it….” A great way to begin a review of plan operations is to study the handy 401k Plan Fix-It Guide provided by the IRS. Awareness of the 12 most common errors associated with retirement plan operations positions sponsors to secure expert assistance and make corrections. Because compliance errors are an ongoing possibility, another prudent practice for retirement plan sponsors is protecting themselves with fiduciary liability insurance. Experts emphasize  that plan sponsors can be held personally responsible for mistakes made in the operations of the retirement plan, even when third party administrators are involved. Because it is impossible to fully eliminate the inherent risks associated with sponsoring a retirement plan, it makes good sense to reduce them via fiduciary liability insurance. Colonial’s affordable policy provides defense costs and penalty limits up to $1,000,000 if you face allegations over an error in plan administration.


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