10 Tips for 401(k) Compliance

If your company offers a 401(k) retirement plan, 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. To make your audit process as smooth as possible, there are some critical points to consider when preparing for your retirement plan audit and having 401(k) compliance.

Generally, a plan is considered a “large” plan and requires an audit when there are more than 100 participants on 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.

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 with a balance in their plan.

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.

It’s important to ensure that all deferred compensation 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.

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 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).

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

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 when the deferral was withheld. Businesses with less than 100 participants are eligible for a seven business day safe harbor rule.

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

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.

When employees are offered the option of managing their investment portfolio, make sure they are given adequate information on the investment choices as well as the fees associated with those options. 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 401(k) compliance, or if you want to find out how Sensiba can help make your 401(k) plan audit as seamless as possible, don’t hesitate to get in touch with one of our audit specialists.