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Benefits primer: How to stop worrying and love your 401(k) plan

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in HR Management,Human Resources

Admit it. Administering your company’s retirement plan is probably one aspect of the job you wish you could leave behind. But it’s an important one.

A retirement plan is a legally binding document that gives enforceable rights to plan participants. Failing to follow plan terms can be a headache—and costly!

Fortunately, a few easy steps can help keep your retirement plan on track and in compliance.

Get plan documents in order

Be sure you have all of your plan documents … and the amendments! Then read and understand them. Knowing what your plan document says is essential, but can be trickier than it sounds.

For example, many plans actually consist of two documents:

  • The adoption agreement contains all the administrative choices that are unique to your plan: who is eligible to participate, the type and amount of contributions, etc.
  • The basic plan document contains all the boilerplate language that dictates how to administer those choices.

Without both documents, you may know only half the story, leading to costly plan administration errors.

Unless it has only recently been adopted, your plan will also likely have a variety of amendments. From time to time, Congress amends the retirement plan rules, requiring updates to reflect the changes. Sometimes your plan provider can do this on your behalf. In other cases, you must take action to formally adopt an amendment.

Either way, be sure you have the plan amendment in your files and are comfortable that everything necessary has been completed to ensure compliance with the change. Your company will be responsible for any failure to adopt plan amendments or comply with them.

Once you have your plan documents, don’t just stick them in a drawer! Check for signatures and dates. If you find an unsigned document, consult your document provider or attorney to see if a correction will be necessary. The IRS regularly audits timely adoption of plan amendments, and errors can result in expensive penalties if they’re not voluntarily corrected.

Tip: If your 401(k) file is looking suspiciously thin, just ask! Your provider should be happy to send you the complete plan document upon your request. Be sure each document is signed and dated.

Review your plan’s SPD

The plan’s summary plan description—or SPD—is the summary of your plan document, which should be written in plain English. Since your plan’s SPD should accurately reflect the major terms, reviewing it is an easy way to better ensure that your plan administration is consistent with the plan terms.

Be sure to involve all the relevant players in your review. For example, payroll may want to review the definition of compensation. HR may want to review the eligibility requirements.

If there is a conflict between the document and the plan’s administration, contact your attorney to determine whether you need to take corrective action.

Tip: Take the team approach. Everyone involved in your retirement plan’s administration should be familiar with and have access to the plan terms to help identify and solve plan administrative errors.

Check for compliance pitfalls

Carefully review the most common sources of plan errors: compensation and eligibility. Although any plan error can be costly, some are more costly than others.

Failure to properly administer the plan’s definition of compensation is one of them.

For example, bonuses, commissions and overtime pay are often included in the document definition of compensation. In reality, employers often fail to account for them when making 401(k) contributions. That causes under-contributions. When such errors affect many participants or continue for many years, the costs can add up quickly.

Mistakes in administering eligibility can also be costly.

Failing to follow the plan’s eligibility requirements may cause employees to be improperly excluded from the plan.

Since a typical correction for this type of error requires the employer to make up all of the contribution that the participant missed, even a couple of erroneous exclusions can lead to an expensive problem.

Tip: Stay vigilant! Keep on top of your plan’s administration with periodic reviews of problem areas.

Problem solving

So you found a problem. Now what? First of all, congratulations! Identifying and voluntarily correcting plan errors can save your company hundreds of dollars—if not thousands. That’s because you can fix errors on your own for a fraction of what it would cost if the IRS discovered the problem during an audit.

If you discover a particularly complex problem, contact your attorney to take advantage of the variety of IRS correction programs available to you. An experienced lawyer can help you navigate the IRS’ corrections program to fix your plan error, minimizing costs and risk. You’ll be glad you did.

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