written by Jacque Mattson

Jacque Mattson head shot

There are many different parties involved with an employee benefit plan: the record keeper, custodian, trustee, plan sponsor, and auditor, just to name a few. With so many different people playing different roles, it is hard to keep straight on what the plan sponsor’s responsibilities are related to the plan. Here are some common pitfalls to avoid when it comes to the everyday function of your plan:

  1. Know Your Plan Document – Sometimes plan documents will be set up by a third party, read through a couple of times, and then put up on a shelf with policies and procedures in place that may or may not abide by the plan document. The plan document is key to running the plan. If the policies and procedures in place do not follow the plan document this is an operational defect that could cause the plan to become disqualified. It is the responsible of the plan sponsor to know the plan and know if it is being followed.
  2. Compensation – The definition of compensation within the plan document is an area that plan sponsor’s struggle with following. Most plan documents will say that compensation is W-2 wages, while others might list out various exclusions. Compensation drives the employees and employers contribution amounts, and plan sponsors should communicate this definition to payroll in order to make sure the plan is being followed. Failure to follow the definition laid out in the plan documents could mean that the plan sponsor has to cover any additional contributions that may be owed to a participant plus interest that would have been earned on those funds along with penalties and taxes due to the noncompliance.
  3. Enrollment Forms – Enrollment forms should be kept for all eligible participants whether they are contributing to the plan or not. New enrollment forms should be signed and kept if a participant wants to change his/her deferral percentage. If enrollment forms are not kept on file for all eligible participants, this could raise a red flag on whether or not they were properly informed about their eligibility to participate in the plan.
  4. Fidelity Bond – ERISA requires that a plan be properly bonded in order to protect the plan from fraud, theft, or other dishonesties. The requirement states that the bond should be 10 percent of investments but no greater than $500,000 (or $1,000,000 if plan sponsor stock is held by the plan). If the plan sponsor decides to start with a low value bond, sometimes the requirement to raise the value is missed when the plan investments start growing.

If you have any questions about avoiding these common pitfalls, please contact us at 417-881-0145.