written by Kevin Hogan
Employer sponsored 401(k) and 403(b) retirement plans continue to be the most popular means for providing retirement savings to company owners and their employees. But employers need to be aware that the Internal Revenue Service, along with the Department of Labor, have stepped up their efforts to ensure these plans are operating in compliance with IRS rules.
This article addresses some of the more common compliance issues employers’ need to be aware of when operating their 401(k) and 403(b) plans.
Timely deposit of employee contributions
The IRS requires that any payroll amounts withheld for employee contributions to be deposited into the plan’s trust on a timely basis. Deposits deemed to be late by the IRS are subject to both an excise tax and a penalty for lost employee earnings. So it is crucial employers understand what constitutes a timely deposit under the IRS rules.
In prior IRS guidance, employers of all sizes were required to transmit employee contributions to the plan’s trust fund as soon as the amounts could reasonably be segregated from the general assets of the employer, but no later than the 15th business day of the month following the month in which contributions were withheld by the employer. However, in recent IRS guidance, plans with fewer than 100 participants are now required to deposit employee contributions within 7-days of withholding, unless the employer can show a “reasonable” basis for needing additional days to make the deposit. It is important to coordinate a schedule with your payroll service to ensure employee contributions are timely deposited into the plan’s trust fund.
Employee deferrals (contributions)
The IRS places a limit on the amount of 401(k) and 403(b) elective deferrals a plan participant may exclude from taxable income each year. For 2011, participants under the age of 50 can defer up to $16,500 ($17,000 for 2012), while participants age 50 and older can defer up to $22,000 ($22,500 for 2012).
Employers need to ensure that participant deferrals do not exceed the IRS dollar limits. If a plan participant’s elective deferral does exceed the limit allowed, then the excess amount, plus applicable earnings, must be distributed to the participant by April 15 of the year following the year in which the excess occurred.
Notification to Eligible Employees
Your plan document provides specific requirements for when employees become plan participants eligible to make contributions into your retirement plan. Every employee who received a W-2 for the year should be scrutinized to determine who is eligible to participate. Those employees who are eligible to participate should receive the following forms and notices:
- Payroll Deferral Election Form
- Summary Plan Description
- Safe Harbor Notice, if applicable
- Beneficiary Form
It is highly recommended that each and every eligible participant complete a Payroll Deferral Election Form, including all eligible participants who do not wish to contribute to the plan. This procedure prevents an eligible participant who does not contribute to the plan, from later claiming that they were not notified of the eligibility to defer.
Basic Fiduciary Responsibilities
Those persons, who often times are the company’s owners, are fiduciaries of the plan with respect to the participants and beneficiaries in the plan. The fiduciary’s responsibilities include:
- Acting solely in the interest of the participants and their beneficiaries
- Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan
- Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters
- Following the plan documents
- Diversifying plan investments
These are the responsibilities that fiduciaries need to keep in mind as they carry out their duties. The responsibility to be prudent covers a wide range of functions needed to operate a plan. And, since all these functions must be carried out in the same manner as a prudent person would carry them out, it may be in your best interest to consult experts in the various fields, such as investments and accounting.
Some decisions with respect to a plan are business decisions, rather than fiduciary decisions. For instance, the decisions to establish a plan, to include certain features in a plan, to amend a plan and to terminate a plan are business decisions. When making these decisions, you are acting on behalf of your business, not the plan, and therefore, you would not be a fiduciary. However, when you take steps to implement these decisions, you (or those you hire) are acting on behalf of the plan and thus, in making decisions, are acting as fiduciaries.
The Department of Labor requires employer sponsored plans to carry a fidelity bond, in the name of the plan, in order to cover any potential loss against those individuals handling funds of the plan. The fidelity bond amount needs to be at least 10% of plan assets, up to a maximum bond amount of $500,000. Please review your fidelity bond policy to ensure it is updated with the required coverage amount.
Every year it is important to take the time to review the operation of your company’s retirement plan, in order to ensure it is in compliance with the ever changing IRS’s rules. This article provides only a brief discussion of just a few of the compliance issues you may face when operating your company’s retirement plan. You can count on The Whitlock Company to ensure compliance is effortless. Contact us with any questions about your employer sponsored retirement plan.
Kevin specializes in tax consulting for businesses and individuals. Including employee benefit plan accounting and administration, specific expertise in qualified retirement plans and cafeteria plans. His education includes a B.S. in accounting and business administration from the University of Kansas. Kevin also earned a M.B.A. from the University of Kansas and a Master’s degree in Tax from Northern Illinois University.