401(k) Compliance

Best tips for maintaining compliance within your plan

If your company offers a 401(k) retirement plan, then you understand the extraordinary benefits it can offer your workforce.  What many companies don’t realize, is that your company’s size dictates whether or not your 401(k) plan requires a third party audit. Ensuring your plan is up-to-date with compliance standards is key, and there are often overlooked issues that serve as red flags for the Department of Labor (DOL) and/or the IRS. In order to make your audit process as smooth as possible, there are some critical points to consider when preparing for your 401(k) retirement plan audit.

1. Know the 80/120 rule

Generally, a plan is considered a “large” plan and requires an audit when there are more than 100 participants as of the first day of the plan year. If the plan had less than 100 participants the previous year, but still has less than 120 participants in the current year, it can still be filed as a small plan and forego the audit requirement. This rule applies so long as the eligible participant count remains less than 120.

2. Make sure to count everyone

Whether or not every employee chooses to participate in the 401(k) plan, any employee eligible to participate is considered an eligible participant. This includes terminated and deceased employees who still have a balance in their plan.

3. Protect against fraud

Under Section 412 of the Employee Retirement Income Security Act (ERISA), a fidelity bond must cover at least 10% of the plan’s assets in case of fraud or dishonesty. As plan assets increase each year, an increase in coverage could be required if the bond no longer meets the 10% minimum requirement.

4. Ensure correct deferrals

It’s important to ensure that all compensation being deferred falls under the eligible compensation outlined in the plan documentation. Furthermore, all other forms of compensation (such as allowances) are not calculated in the deferrals.

5. Keep up with updates

Always keep your plan documentation updated with the most current compliance standards and laws. It’s helpful to keep records and make the documentation of all amendments easily accessible. This allows for all participants to fully benefit from the plan, particularly when the documentation has not been recently revised. (Example: starting in 2015, the maximum contribution to a 401(k) plan was increased to $18,000).

6. Use the fiduciary committee

It’s a good idea to draft and record your annual 401(k) committee meeting in order to help prove and defend any allegations of breach of duty.

7. Timing is everything

Ensure that employee contributions are deposited within a reasonable amount of time. This can be either a timeframe outlined in the plan’s documentation, or at a maximum, the 15th business day of the following month of when the deferral was withheld. Businesses with less than 100 participants are eligible for a seven business day safe harbor rule.

8. Monitor excess employee contributions

There is a legal cap placed on the dollar amount participants are allowed to contribute to their 401(k) plan each year. If excess contribution is found, necessary actions must be taken to remove the excess contribution and avoid penalties.

9. Watch the employer match

If your company offers employer matching, it is important to note any maximums on your plan documentation, as well as not surpass the legal matching cap. There is also a limit placed on the combined contribution of employee and employer. This cap often changes and should be monitored each year to ensure compliance.

10. Shift the risk 

When employees are offered the option of managing their own investment portfolio, make sure they are given adequate information on the investment choices as well as the fees associated with those options. In order to avoid liability issues, there must also be a statement from the committee relieving themselves of fiduciary duty.

For companies that require an audit, Form 5500 is due by the last day of the seventh month after the plan’s year end. For example, if the plan’s year ends on December 31, Form 5500 will be due on July 31, with an optional extension through October 15 (Form 5558).

If you would like to learn more about the rules and regulations surrounding your benefit plan, or if you want to find out how Sensiba San Filippo can help make your 401(k) plan audit as seamless as possible, please contact one of our 401(k) audit specialists at 925.271.8700 or at info@ssfllp.com.