In most cases errors in the administration of a retirement plan result from the ERISA administrator’s lack of understanding of the provisions in the plan document. A clear example would be the definition of compensation. Does it exclude some part of compensation, e.g. bonuses, is it based on the plan year or calendar year? Understanding eligibility requirements as they relate to entry dates in another potential for an operational error when an employee enters the plan too early or too late. To avoid errors of this type, the plan should have a written administrative policy that identifies who is responsible for the various functions required to manage the plan. Will the plan sponsor or the payroll vendor be responsible for monitoring timely deposits of employee deferrals? Does the plan document indicate when and how often an employee can make changes to their deferral election?
Procedures for choosing and monitoring plan vendors should be addressed in the administrative policy document. Both the choice and monitoring is a fiduciary function and in the event of a breach of duty the fiduciary is personally liable. For complex rules it is advisable to have an ERISA attorney available or on retainer for a large plan.
The IRS offers fix-it guides for 401(k), 403(b), SARSEP, SEP and SIMPLE IRA plans at https://www.irs.gov/retirement-plans/. The 401(k) guide lists twelve common errors, and how to find the mistake, fix the mistake and avoid the mistake in a chart format. In addition, there is an explanation of the process to find the mistake, fix it and avoid the mistake. Included in the guide are corrections for using the wrong definition of compensation, processing loans and hardship withdrawals, and late remittance of employee deferrals, among others.
Rather than wait for an error to be uncovered on IRS or DOL audit, or uncovered at a later date during annul administration, plan sponsors should review plan operations during the year. In addition to the IRS fix-it guides, checklists are available at https://www.irs.gov/pub/irs-pdf/p4531.pdf for the same plan types as the fix-it guides. The checklists include twelve yes and no questions with a short explanation and a link to the comparable plan’s fix-it guide.
For most plans, an operational failure is when a plan sponsor does not follow its plan’s terms. Operational failures include:
- limiting a participant’s compensation based on IRS published limits
- satisfying the actual contribution percentage test requirements
- complying with the distribution restrictions, e.g. no provision for in service distributions
- satisfy incidental death benefit rules for plans with life insurance
- pay minimum required distributions (RMDs) when due
- allow employees the right to elect a direct rollover
- limit annual elective deferrals based on IRS published limits
- limit contributions and/or allocations based on IRS published limits
These operational failures, in most cases, can be self-corrected using the IRS Self-Correction Program (SCP).
Stephen Abramson, CPC APS Pension Services Inc. firstname.lastname@example.org