Oct. 15 is the extended due date for filing a calendar year-end employee-benefit-plan tax return — Form 5500. This means that many of you are wrapping up your annual financial statement audit, or are working with your third-party administrator to remember your PIN and password, which is needed to electronically file your return.
As an auditor of these plans, I often see fiduciaries who are not fully aware of the specific provisions of their plan or the rules and regulations regarding their administration. As a result, there are many errors that can occur. Some of these errors can lead to serious consequences regarding the continuation and qualified status of the plan.
While preparing your plan’s tax filing, it’s a good idea to re-evaluate some of the process and controls involved, making adjustments and improvements where necessary.
This article is intended to highlight some of the more common errors that are found in retirement plan administration, including the timing and remittance of employee-deferral contributions, the improper application of the definitions of eligibility and compensation, the improper use and review of hardship distributions, and a general overreliance on the plan’s third-party administrator.
Timing of Employee Deferrals
Employee-deferral contributions are required to be remitted to the plan as soon as they can be segregated from the company’s general assets, but in no event later than the 15th business day of the month following the month they were withheld. In many instances, plan administrators will cite the 15-day rule when discussing their remittance policies. It should be noted that the 15-day rule is not a safe harbor, but rather the last day before contributions are automatically considered late.
More often than not, upon examination by the Department of Labor, examiners will look at when all other payroll taxes were remitted by the company. In addition, they will look at consistency, adherence to the established policy, if any, and past history. With technology today, most plans should be able to remit these funds within three to seven business days. Any remittances that fall outside of the established guidelines, even if only by one day, may be considered late and consequently subject to corrective procedures and excise tax reporting.
Eligibility and Compensation
There are many items that are defined in the plan document. Two of the most misunderstood and/or overlooked definitions are those for plan eligibility and compensation.
Misunderstanding the plan’s definition of ‘eligibility’ often leads to employees being delayed entrance to a plan when they are eligible, while other employees are allowed to enter the plan prematurely. Many administrators misinterpret the difference between when an employee meets the eligibility requirements and when the employee is allowed to enter the plan. For example, if an employee meets the eligibility requirements of a plan on June 1 but there is a quarterly entrance date, the employee may not be able to enter the plan until July 1.
If for any reason you feel that this is not being performed properly, please check with your third-party administrator or CPA, as the penalties for failing to comply with the provisions of a plan can be severe.
Compensation is another area to which plan administrators need to pay particular attention. First, not every plan uses the same definition of compensation. Second, the plan may use different definitions of compensation for different purposes, such as for deferrals and employer contributions. Most often overlooked is the treatment of bonus compensation in relation to the plan definition of ‘eligible compensation.’ For example, if the plan elects to use W-2 wages as its definition of compensation, all bonuses, whether through payroll or manual check, must be included when calculating the employee deferrals. If not, a written election from the employee must be on file.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.