As a plan sponsor, you are ultimately responsible for your company’s retirement plan. And while you may have worked hard to ensure that yours is well run and that your vendors are proactive and fully competent, it’s not uncommon for something to fall through the cracks. Keep reading to learn about three common mistakes that are overlooked and how to avoid them moving forward.
New Employee Enrollment
It’s critical to understand your plan’s eligibility requirements to ensure that all newly eligible employees are enrolled at the proper time.
The Problem: Imagine that your plan document states that an employee must work for you for six consecutive months and should be at least 21-years-old before they are eligible to enter into the plan. Furthermore, your plan’s entry dates fall on the first day of each quarter. Under this scenario, if you were to hire “John” on March 17, 2016, and John’s date of birth is Oct. 25, 1995, when will John be eligible to enter your company’s plan?
While John will meet the 6-month service requirement on Sept. 17, which would typically grant him entry into the plan on Oct. 1, he does not meet the age requirement. Therefore, in order to comply with the plan document, John’s entry date into the plan is actually Jan. 1.
The Fix: Make sure you have good processes in place to determine the appropriate entry dates for all new hires. If an employee misses the opportunity to participate as a result of an error made by the plan sponsor, the employer is required to correct the mistake by making a corrective contribution. This could be costly, especially if a significant amount of time has gone by without the employee being offered the opportunity to participate in the plan.
Regardless of how skilled you may be when it comes to data entry, it only takes one messy keystroke to cause major havoc in your plan contribution records.
The Problem: Manual entry of plan contributions can result in keying errors or worse – deposits made into the wrong employee’s account. Discovering that Mary Smith received some of John Smith’s contributions and John Smith received some of Larry Smith’s contributions and so on is not only a nightmare to fix, it can be expensive.
The Fix: The easiest way to ensure accurate records is to automate the process. This will take human error out of the equation. If possible, work with your payroll company to create a file that can be uploaded to your plan record keeper in an automated format.
Understanding how the word “compensation” is defined is incredibly important and could result in the failure of your plan document. For example, if your plan references all W-2 compensation, all regular wages, bonuses, commission, overtime, etc. are eligible and should be withheld.
The Problem: Consider, for example, that an employee received a performance bonus but the 401(k) contribution wasn’t withheld. In this scenario, unless specifically excluded in the plan document, employee bonuses are eligible for the 401(k). This missed opportunity to defer eligible compensation equates to a plan document failure.
The Fix: The good news is that most documents allow flexibility to make a separate election on bonuses, therefore, if an employee would like to make a separate election, be sure the request is documented.
A review of your benefit plan is a great way to not only identify and fix existing problems, it arms you with the information needed to avoid future issues from occurring. The key is to stay proactive when it comes to managing the operations of your company’s retirement plan. For more tips to keep your retirement plan on the right track, email Rea & Associates.
By Steve Renner, QKA (New Philadelphia office)