Don’t Put Your Plan at Risk: PSCA National

A breakout workshop at PSCA’s National Conference on May 5^th provided attendees a practical checklist of items to review annually to ensure their plan is legally compliant with all regulations. The workshop was presented by Ira Finn, Ryan Specialty Group, Maryanne Vuckovich, PMB Real Estate Services, and moderated by Samuel Haines, MMA Retirement Services.

Ira Finn started the workshop by sharing a few key items to keep in mind:

• your auditor is friend, you want to fix the mistakes they find before there is an issue with a DOL or IRA audit,
• don’t clean up errors with band-aids, you’ll just have to keep reapplying so take the time to fix them, and
• read through your plan document occasionally and make sure you are familiar with it (reading a plan document is fun!).
   

And also, document, document, document, and then document again. The best defense against a DOL audit is a good offence and that includes documenting EVERYTHING. 

The panel recommends that you perform an internal audit on the following systems: payroll, vendor contracts, investment and fiduciary committee documents, plan documents, and 5500 documents. 

Occasionally auditing these systems and ensuring that everyone is doing what they should be doing will help catch any errors quickly so they can be remedied before they become an issue.

The panelists then went through a checklist of common errors that plan sponsors should be aware of and double check.

1) Is your definition for all deferrals used correctly?
Plans use different definitions of compensation for different purposes. Ensure you know what your plan’s definition of compensation is and that it is being implemented correctly through payroll. Do an annual or annual and mid-year review of eligible earnings.

2) Were matching contributions made to all appropriate employees under the terms of the plan?
Review the plan document and the matching formula and definition of compensation and ensure that payroll is processing both correctly. Any errors in elective deferrals (see item 1) are likely to lead to errors in matching contributions being provided properly. Review your plan document for frequency of contributions (weekly, pay period, annually, etc.) and ensure that contributions are being made on time. If contributions are not made annually review and consider a true-up match.  

3) Were eligible employees identified and given the opportunity to make elective deferrals?
Review the plan’s eligibility requirements and ensure that all employees that become eligible during the plan year were given the opportunity to participate. Employees switching between full and part time may change eligibility. If part-time employees are excluded from other benefits but allowed to participate in the 401(k) plan, ensure that payroll isn’t excluding them (common error that some attendees have experienced).

Your payroll vendor should be able to pull the reports for you. If there is an error correct it immediately (may need to make a qualified nonelective contribution to missed employees).

4) Are elective deferrals limited to the amounts under IRC 402(g) for the calendar year?
Check that elective deferrals are limited to allowable amounts under the regulations, or you will have to return the money to the employee, and they will have to pay taxes. A best practice is to do a mid-year review and see if anyone is on track to exceed limits rather than waiting until year-end so you can prevent that over contribution rather than having to make a corrective distribution. If participants were allowed to make excess deferrals, they must be returned by April 15th.

There have been a lot of job hoppers this year who may have made contributions across multiple plans and end up exceeding contribution limits. Though it is really up to the employee to track it, it may create a problem for your plan and is something to consider with new hires.

You also want to make sure your payroll provider is updating the limits every year as appropriate.

5) Do participant loans meet the plan document and IRC Section 72(p) requirements?
Review your loan policy and ensure loans taken meet the plan document and section 72(p) limits (50% of the employees’ vested account). Review loans annually and consider asking your recordkeeper if they can provide automatic notifications when loans are close to defaulting. If employees don’t pay back loans, they become taxable income. Education about the tax implications to employees before they take a loan is important.

Plans loans are the most audited plan item and come with a lot of administrative complexities. If your plan hasn’t already, consider putting some restrictions around loans (number allowed, amount allowed, rules regarding defaulting and taking a new loan, etc.). Consider a 30 day cooling-off period between loans.

The number of loans during covid and the different regulations that temporarily increased loans are leading to many issues and non-compliance so if your plan allows loans, review these items.

6) Were hardship distributions made properly?
Review hardships and ensure that they were only taken under conditions allowed under the plan document. If hardships are handled directly by the provider, you may need to review. Keep all records and documentation of the process of reviewing hardships.

The panelists provided links to two resources from the IRS to help, the 401(k) Plan Checklist and a 401(k) Plan Fix-It Guide.