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 the size of your company 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 maintaining 401(k) compliance.
Best Tips for Maintaining 401(k) Compliance Within Your Plan
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 with account balances on the first day of the plan year. If the plan had more than 80 participants with account balances the previous year but has fewer than 120 participants in the current year, it can follow prior year’s filing as a small plan and forego the audit requirement.
2. Understand Eligibility
Whether or not every participant is employed by the company, an employee is eligible to participate if they meet the definition of eligibility outlined in the plan documents. Eligibility is the minimum age and service requirement that the plan requires as a condition of participation. Based on eligibility requirements of the plan, the plan should determine which individuals are eligible to participate to join the plan or would be automatically enrolled in accordance with plan provisions.
3. Protect Against Fraud
Under Section 412 of the Employee Retirement Income Security Act (ERISA), a fidelity bond must cover the plan’s assets in case of fraud or dishonesty. The fidelity bond must cover at least 10% of the plan’s assets as the beginning of each plan year, subject to a minimum bond amount of $1,000 and a maximum of $500,000 ($1,000,000 for plans that hold employer securities). As plan assets increase each year, an increase in coverage could be required if the bond no longer meets the 10% minimum requirement.
4. Define Eligible Compensation
It’s important to ensure that all deferred contributions were calculated properly under the definition of eligible compensation outlined in the plan documents. There are various types of compensation that may be considered ineligible in accordance with plan documents and should be excluded from the calculation of deferrals.
5. Keep Up With Updates
Always keep your plan documents updated with the most current compliance standards and laws. It’s helpful to keep records and make all amendments easily accessible. This allows all participants to fully benefit from the plan, particularly when the documentation has not been recently revised.
6. Establish a Fiduciary Committee
It is important to establish a Fiduciary Committee to provide oversight for vital functions such as:
- reviewing the plan’s investment policy statement,
- monitoring service provider performance and associated plan expenses,
- reviewing and authorizing plan amendments or changes to the plan document,
- and other reviews.
It’s a good idea to draft, record, and retain your annual 401(k) committee meeting minutes 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 as administratively feasible. Businesses considered to have a small plan are eligible for a safe harbor rule that allows for a seven-business day window to deposit contributions.
8. Monitor Excess Employee Contributions
There is an annual addition limitation designated by the IRS, subject to change every year, that is 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 and potential tax issues.
9. Watch the Employer Match
If your company offers employer matching, it is important to note any maximums in your plan documents, as well as to not surpass the Plan’s matching cap. There is also an annual addition limit, subject to change by the IRS, placed on the combined contribution of employee and employer. This limit should be monitored each year by the plan to ensure compliance.
10. Shift the Risk
When employees are offered the option of managing their investment portfolio, make sure participants are given adequate information on the investment choices as well as the fees associated with those options. While providing participants with investment choices may reduce fiduciary liability, the committee should still maintain oversight and ensure participants are well-informed.
For companies that require an audit, Form 5500 is due by the last day of the seventh month after the plan’s year-end with a two and a half month extension. 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).
Do You Need Help With Your Company’s 401(k) Compliance?
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 employee benefit plan audit specialists.
