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5 min read

Administrative Risks in Your 401(k)

Healy Jones
June 27, 2017
Administrative Risks in Your 401(k)
Table of contents

A 401(k) a plan is a wonderful way for you and your employees to accumulate retirement assets. But managing a 401(k) is also administratively complicated and chock full of moving parts. If you or your staff is charged with keeping your plan running smoothly, you know that all that complexity can lead to mistakes. Certain tasks may be overlooked or done improperly. If these mistakes go uncorrected they can result in fines, some of them quite hefty. Worst case, failure to comply with certain 401(k) regulations can result in “disqualification.” That means the plan loses its tax exempt status. And that could mean unexpected taxable events for plan participants. And distributions from plans that have lost tax exempt status are not eligible to be rolled over into an IRA account. Probably a risk that you don’t want to take!

Penalties for non-compliance were increased recently, thanks to an inflation adjustment. The last such increase was implemented in 2003. So even with the low inflation of the last several years, this “catch up” is a meaningful one. For example, failure to submit Form 5500 now carries a maximum penalty of more than $2,000 per day, double the old level. The new penalties became effective in January this year.

If you or your team are handling the administration of the company 401(k), there are plenty of things to watch out for. Below we present some of the more common oversights:

10 common 401(k) administrative mistakes

  1. Failing nondiscrimination tests. If a plan fails its “top heavy” test or the other nondiscrimination tests– measures of the contributions made by highly compensated employees compared to those made by rank-and-file employees – the plan must take steps to correct the mismatch. This can include having to distribute assets back to the highly compensated employees. That means earnings that were intended to be diverted to the 401(k) suddenly become taxable income.
  2. Recurring corrective distributions due to failing nondiscrimination tests. If the company continues to fail these tests as described above, it may indicate a weakness in plan administration, plan design or employee communication. The plan should be regularly evaluated to see if the plan is “healthy” by these measures. Improved employee engagement can often ensure plans pass these tests without resorting to a Safe Harbor Plan.
  3. Not following plan documents when dealing with terminated employees. Your plan documents very likely explain how to treat the assets of employees who are no longer with the company. Since terminated employees are generally allowed to roll out their assets into their new employer’s 401(k), or into an IRA, it may not make sense for them to stay in your plan.
  4. Lacking adequate fidelity bond coverage. This is a fairly common shortcoming, but an important requirement to meet. Generally, a fidelity bond equal to 10% of plan assets or $500,000, whichever is less, is required for the plan administrator and those responsible for receiving and distributing funds. Avoid overlooking this requirement or carrying too little coverage.
  5. Salary deferrals not deposited in a timely manner. Employee 401(k) contributions must be segregated from general assets in a timely manner. The company should coordinate with their payroll provider in setting up procedures to ensure deposits are made at the earliest date possible. The Department of Labor has specified the amount of time that you can wait – and supposedly one third of DOL investigations involve such delays. ForUsAll has built 401(k) recordkeeper payroll integration to help our clients avoid these issues.
  6. The plan document has yet to be updated to reflect regulatory changes. Review your the plan document annually to make sure you are keeping it up to date! We believe that a good advisor will help you keep on top of this.
  7. Employer matching contributions weren’t made to all appropriate employees. Plan administrators must have accurate payroll records to make these calculations.
  8. Employee contributions were matched in excess of the annual compensation limit. In 2016, the maximum compensation allowable as the basis for employer contributions was $265,000. So if the plan promised to match employee contributions up to 3% of salary, the employer’s contribution would be limited to 3% x $265,000, or $7,950. That’s true even if that employee made $1 million. Failing to take this limit into account is just one more administrative risk.
  9. Participant loans don’t conform to IRS rules. If loans are permitted, they must comply with current regulations and be repaid in a timely manner. Loans to owners or officers should be carefully reviewed to ensure they qualify for the exemption from prohibited transactions.
  10. No Form 5500 was filed. Ok, this a big deal. But many employers don’t realize the mistake of not filing until they receive notice from the IRS or Department of Labor. As noted above, failure to file can result in substantial penalties. And to correct this issue, all delinquent returns must be filed.

Mistakes in 401(k) administration

Administrative mistakes are so common that the IRS publishes a “401(k) Plan Fix-It Guide” on their website. The guide suggests remedies for common oversights, including some of those above, and tips on how to avoid them.

At ForUsAll, we run a compliance check on all plans once we become their advisor. During these checkups with new clients, we’ve discovered plans not just light on fidelity bond coverage, but missing it entirely. We have found recurring payroll issues, employee data issues and more!

As a plan sponsor, you take on fiduciary responsibilities for your employees – some might say that you are an employee fiduciary. You need to think about both the investment side of the plan as well as the administrative responsibilities. And you should actively seek to minimize plan administration errors.

This is where ForUsAll can help.

We are proud to provide our clients with full ERISA 3(16) fiduciary services to take on the work and liability for administering your company’s 401(k). With payroll integration and recurring, automatic compliance checks, ForUsAll takes on everything from your plan’s daily operations to making sure that your Form 5500 is complete, signed and filed, reducing the risk and liability of these common 401(k) errors.

If you are looking to stay focused on your business and outsource your 401(k) plan’s administration to an expert retirement administrator, talk to ForUsAll today.

Download the 2024 Safe Harbor Guide
Understand new rules for 2024, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.
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Healy Jones
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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.