Here are 3 common mistakes plan sponsors make that throw their retirement plans out of compliance. (Photo: Shutterstock)

With one in three retirement plans audited by the Internal Revenue Service or Department of Labor over the past two years and the government hiring more staff to conduct even more frequent examinations, 401(k) and 403(b) retirement plan sponsors should act to correct possible violations before Washington finds them first.

Related: Quiz: 401(k) plans and compliance

The Employee Benefits Security Administration (EBSA) — the DOL agency that enforces the Employee Retirement Income Security Act of 1974 (ERISA) — is increasing audits of pension plans.

This follows a DOL report, Assessing the Quality of Employee Benefit Plan Audits, which reviewed Form 5500 annual filings and related audit reports of retirement plans. It found that 39 percent of filings — covering $653 billion of assets and 22.5 million plan participants — had major problems which would lead to rejection of a Form 5500 filing.

The report found that the plans with the most serious problems tended to have been audited by certified public accountants(CPAs)without genuine expertise in auditing retirement plans.

CPAs performing the fewest benefit plan audits annually had a 76 percent deficiency rate compared to a 12 percent rate for those CPAs that undertook the most plan audits.

Our work with plan sponsors suggests that very few plans are 100 percent in compliance. While many of these problems are small and insignificant, many are serious.

One of the major problems for plan sponsors is that many of them fail to fully grasp the contents of the legal documents directing their plans.

A plan’s Basic Plan Document can be over 100 pages of legalese, setting out in minute detail how a plan should be run, and the associated Adoption Agreement can be another 50 pages.

Add to that any IRS advisory, opinion and determination letters attached to the plan, and it’s easy to see how a plan sponsor can make a mistake executing the complex terms.

Three of the more common mistakes made by plan sponsors include these: not following rules on who is eligible for the plan, not following the plan’s definition of compensation, and not making timely remittances of employee deferrals. Let’s look at all three:

1.     Plan eligibility. There are many operational errors related to plan eligibility and it is important that plan sponsors understand who is eligible to participate and when.  Part time?  Seasonal?  Leased?  Are there different eligibility requirements for employer contributions and participant deferrals? 

On plan eligibility, for example, a sponsor might think employees are only eligible after one year of employment and when they undertake at least 1,000 hours of work every year.

However, once an employee is eligible they can continue in the plan even if they work fewer than 1,000 hours in any given year. 

2.     Definition of compensation. Mistakes are also made calculating what constitutes compensation when determining how much the employer must contribute or the participants deferral amounts.

Do plan documents include such things as car allowances as compensation? Are cash bonuses included? What about moving expenses?

The bottom line is that plan sponsors must calculate contributions and deferrals based on the specific definition of compensation in the plan documents.

3.     Timely remittances of employee deferrals. On deferrals, the DOL’s safe harbor provisions allow plans with fewer than 100 participants to make employee deferrals within seven days, while larger plans must do so as soon as possible after each payroll period, often expected within a day or two after each payroll.

In addition, remittance should be consistent. Many plan sponsors are inconsistent in making these remittances, sometimes doing so after one day and other times within two to three days.  A DOL audit may determine that all should have been made within one day.

While these problems may start with a relatively small monetary discrepancy, the manpower required to correct such issues can significantly exacerbate costs.

For example, say a company has a problem with deferrals that reveals the organization has to make up about $10,000 in lost earnings  on late deposits.

However, due to the labor-intensive work of uncovering and then rectifying those problems,  another $20,000 in compliance and ERISA attorney fees may occur to fix the problem. And, if the problem is uncovered by the government before a self-correction is underway, hefty fines could further bloat costs.

Many plan sponsors may not actually conduct periodic compliance reviews at all because they don’t understand the duties of third-party administrators, ERISA lawyers and consultants.  Many plan sponsors assume that a benefits audit is also a compliance audit — it’s not.

Plan sponsors who want to avoid problems should start by going through plan documents with an expert consultant or ERISA attorney to understand the plan provisions to ensure that all rules and definitions are being correctly applied.

That process should also include a comprehensive fiduciary checklist, including such items as making sure that contributions are made in a timely and consistent manner, that the fidelity bond to protect the plan against theft is adequately funded, and that all the required regulatory and compliance notices are sent to plan participants on time, among other things.

Getting these things wrong, especially in plans with thousands of participants, can quickly add up to significant costs.

In the last fiscal year, EBSA fined plan sponsors $777.5 million for violations. Plan sponsors that don’t want to be a part of that tally for 2017 should undertake a detailed compliance audit.


Mark Dixon and Susan Shoemaker are partners of Plante Moran Financial Advisors. Mr. Dixon leads the institutional investment consulting practice and Ms. Shoemaker, the qualified plans practice.