If you are thinking about including a 401(k) plan among your small business’s employee benefits – or have inherited the management of one – congratulations! A 401(k) is a great way for you and your employees to build a nest egg for retirement. But you should know going in that there is a lot involved. As a result, one of your first decisions should be to decide whether you want to manage the plan yourself or hire a financial firm to take on some, or all, of the day-to-day administration.
To shed some light on the responsibilities involved, below we’ve listed some the biggest administrative and compliance activities associated with offering a defined contribution retirement benefit. Rest assured, this is not exhaustive, merely a shortlist of the common headaches. Staying on top of these regulations (or hiring an expert to) is especially pertinent in light of the fact that the DoL collected a whopping 72% more fines in 2017 than in 2016 from non-compliant plans.
1. Filing the Form 5500: This annual filing provides extensive information about your retirement plan. The form must be filed electronically and no later than the last day of the seventh month following the end of the plan year. For calendar year plans, that’s July 31. The IRS shares the completed form with the Department of Labor.
The objective of the Form 5500 is to show the operations of the plan. For example, the documents reveal how the plan is funded, the number of participants, and whether matching contributions are made. The form comes with schedules, including those requiring financial information such as plan assets and liabilities. Loans must be reported, and plans with more than 100 participants must attach an independent auditor’s report.
Form 5500 hundred can be a chore to complete. The 2016 instruction document was 82 pages long, and it’s easy to make mistakes. We wrote our own form 5500 instructions to help simplify things, but common errors range from misstating the number of participants to failing to attach all of therequired schedules. Penalties for filing late are steep, and are imposed by both the IRS and the Department of Labor.
2. Undergoing and passing nondiscriminatory tests: Your 401(k) must pass certain “tests” to ensure that the plan’s benefits are spread widely among employees. For example, a plan where highly paid employees are participating at rates well in excess of other employees, or contributing a much greater portion of their salaries, could fail one or more of these tests. The IRS has rules that define Highly Compensated Employees (HCEs) and Non-highly Compensated Employees (NCHEs), as well as the calculations to be used in the tests. When a plan fails one or more of these tests, corrections must be made. These corrections could include making employer contributions to NHCEs until the plan passes, or returning contributions to highly paid employees. Passing these tests is key to running a successful 401(k). In fact, some companies adopt a “Safe Harbor” plan that allows the plan to automatically pass key nondiscrimination tests in exchange for making certain regular minimum contributions.
3. Accurately enrolling employees into the plan: Enrolling new employees into the 401(k) plan sounds simple enough. But different plans have different requirements as to when new employees can join the plan. And if there are service requirements, employee tenure can be measured in elapsed time or hours worked.
There are significant implications for inadvertently not enrolling eligible employees. For example, an excluded employee misses the chance to contribute the plan, to benefit from any tax savings by taking the deferral, and misses any employer match. Another common error is that an employee who has yet to make a deferral is incorrectly listed as ineligible. This can result in errors when nondiscrimination tests are performed.
4. Remitting payroll in a timely fashion: The employer is responsible for making sure that a participant’s desired salary deferral is deposited into the 401(k) plan. The IRS frowns upon companies that hold on to their employees’ funds too long before getting them invested. So businesses must have procedures in place to segregate deferral deposits from the company’s general assets within a reasonable period. Regardless, IRS rules require that the deposit be made no later than the 15th business day of the following month. The IRS notes that this limit reflects the maximum allowed, and is not a standard for normal operation. And the Department of Labor requires that small plans perform transfers to the 401(k) within a 7-business day window. Setting up payroll integration with your recordkeeping platform is a good way to limit the potential for these kind of errors.
5. Understanding the vesting period: When an employee makes a contribution to the 401(k) the funds are vested immediately. But the plan can design rules for employer contributions that allow for vesting for over a number of years. However, the plan must abide by IRS minimum vesting requirements. The plan’s vesting schedule explains the degree to which participants are vested based on years of service. But errors can occur, and employees can receive incorrect information on their 401(k) statements, and perhaps even receive an incorrect amount of funds when leaving the plan. Failing to follow the plan’s vesting rules can even result in the plan losing its qualified status. The IRS does offer a route to correct the problem. To avoid an onerous reconciliation process, the correction must generally be made in less than two years. Obviously, the implications for making an error here require a considerable amount of attention to vesting calculations.
6. Abiding by the plan’s loan policies: Participants may or may not be allowed to borrow funds from their 401(k) balances. The rules regarding loans, if allowed, are spelled out in the plan documents. That means that any loans taken out must comply with the rules of the plan. The rules may limit loans for specified purposes or impose other requirements. Regardless, the amount of the loan can’t be more than 50% of a participant’s vested account balance. Further, loans must be repaid within five years unless the purpose of the loan is to purchase a primary residence. Care must be taken that both IRS rules and the plan’s own rules are followed.
****7. Benchmarking fees: Plan fiduciaries are responsible for ensuring that fees paid from plan assets are reasonable. This requires an understanding of the service provider marketplace sufficiently to know when fees are reasonable or excessive. As a result, fiduciaries must regularly review service provider fees. This requires knowing how much each service provider is paid – a task that can be difficult if fees are buried in revenue sharing arrangements. Using only providers that charge fees directly (rather than indirectly) can facilitate the benchmarking process.
8. Managing investments: An investment policy statement can be critical when it comes to building a fund lineup. The policy should explain how the plan’s investments are selected and how they are monitored. There should also be clear criteria for adding and removing investments. ERISA’s Section 404(c) protects plan sponsors from liability for losses from participant-directed investments – but only if the plan satisfies the investment menu requirements, design and administrative requirements, and information/disclosure requirements. Also, if the plan automatically enrolls eligible participants into a specific investment option, that default option must meet certain requirements. The plan must also notify the participants of their first investment in that default investment option. Writing an investment policy statement is just the beginning. It must be applied to the plan’s investments, and the investments must be regularly reviewed to ensure they remain suitable given the investment policy statement.
If you have a small business to run, you probably don’t have time to tackle even half of these time consuming, yet critical duties. That’s where ForUsAll can help. Unlike traditional 401(k) advisors, ForUsAll takes on both the 401(k) investment and administration responsibilities. That means smaller companies can reduce the liability and workload associated with offering a great 401(k).
At ForUsAll we sync payroll with your retirement plan to reduce your workload, liability and headaches. Our technology simplifies the onboarding process and automatically enrolls participants into target-date funds.
That’s not all. ForUsAll handles enrollment and payroll deductions. And a plan administrator will file and sign the Form 5500 on your behalf. When it comes to the investment lineup, our philosophy is to avoid unnecessary fees and unnecessary risk. We provide an ongoing fiduciary review of your plan’s investments, looking at both qualitative and quantitative measures.
In 401(k)-speak, we offer 3(16)fiduciary services. That means we can take the work and liability of administrating your 401(k) off your plate.
So if you’re ready for you and your employees to start saving in the company 401(k), but not ready for the associated headaches, talk to us today!