Key insights
- Employee benefit plan sponsors have a responsibility to oversee defined contribution plans, such as 401(k) and 403(b) plans.
- Mistakes can lead to financial penalties or administrative difficulties, but plan sponsors can implement policies to mitigate these errors.
- Find out how you can help keep your plan running smoothly, comply with regulations, protect employees’ assets, and reduce the risk of penalties.
Mitigate risk related to your employee benefit plans.
Limiting the possibility of errors in 401(k) and 403(b) benefit plans can be a daily struggle for plan sponsors trying to keep their plans running smoothly. Review some of the more common mistakes and how plan management and governance can help prevent them from happening.
Common errors in defined contribution (DC) plans
Incorrect definition of compensation
The compensation used in the calculation of employee deferrals and employer match may not agree to the definition of compensation as determined by the plan document.
For instance, bonuses may be excluded from compensation when calculating an employee’s deferral. If a bonus is not specifically excluded from compensation in the plan document, this is a failure to follow plan provisions and could lead to delays and financial penalties.
Excess contributions
The IRS requires plan sponsors to perform annual testing to confirm that highly compensated employees are not unfairly benefiting from the plan. These tests may result in additional employer contributions or other corrections.
Late remittances
According to the Department of Labor, remittances of employee deferrals should be made as soon as administratively feasible, with penalties assessed for any late contributions.
Stay informed with the latest employee benefit plan rules. Access our report for key updates.
How to help avoid errors in DC benefit plans
In addition to staying updated with the latest rules and regulations for employee benefit plans, plan sponsors can implement policies and procedures to mitigate the impacts of errors.
Incorrectly defined compensation
Perform periodic tests
Select a sample of employees and their paystubs to double check that employee deferrals and employer matching contributions were calculated correctly. It is especially important to review off-cycle payroll.
Review payroll setup
Work with your payroll provider periodically to review the setup of your individual pay codes to verify pay codes are correctly classified as eligible or ineligible for deferrals and matching calculations as determined by the plan document. During this review, pay particular attention to bonuses as well as new and rarely used pay codes.
Excess contributions
Make it part of onboarding
When onboarding new employees part-way through the year, request a payroll report from their previous job to be certain the annual limits are properly followed.
As part of the SECURE Act, new plans must include auto-enrollment and auto-increase provisions.
Consider adopting safe harbor plan provisions
Safe harbor plans automatically pass the annual ACP and ADP tests. There are a few requirements to become a safe harbor plan, including one of the following employer contribution calculations:
- 100% match to 3% deferral, 50% match to 5% deferral (max 4% match)
- 100% match to 1% deferral, 50% match to 6% deferral (max 3.5% match)
- Nonelective match: 3% match to all employees
Work with your third-party administrator (TPA) to adopt safe harbor plan provisions.
Review compensation definitions
Review your definition of compensation with your advisor. Your advisor can help evaluate whether your definition of compensation can reduce the possibility of discrimination testing issues.
Late contributions
Identify backup personnel
A backup plan should always be in place in case the person in charge of payroll is away (sick, vacation, etc.).
Create reminders
Set up reminders and calendar alerts to enable timely remittances to the TPA or custodian. Your TPA can help with these reminders.
Look for ways to automate processes
Automation can help reduce the administrative lift needed for timely remittances, including:
- Setting up automatic withdrawals from the bank account by the TPA or custodian
- Setting up automatic communication between the payroll system and the TPA or custodian
How CLA can help with defined benefit plans
CLA’s employee benefit plan team can provide guidance and insights to help employers better protect their employees’ assets and conduct a successful benefit plan.
Contact us
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