Employee Benefit Plan Guide for Plan Administrators – Part 2: Common Contribution Considerations
Have you ever wondered what the plan auditors are doing while they are in the office crunching numbers on your employee benefit plan? We are about to let you in on a little secret!
One of the most significant processes involved in operating an employee benefit plan is ensuring that all contributions get applied to the correct individuals, in the correct amount, and on a timely basis. Therefore, much of the plan auditors’ time is spent testing the accuracy and timeliness of contributions. Based on our experience from auditing 50+ employee benefit plans each year, the following are some suggestions for ensuring that Plan contributions are being made in accordance with your Plan Document, and within ERISA, DOL, and IRS guidelines:
- Ensure that all eligible employees are allowed to defer into the plan and ineligible employees are excluded. This is especially important when calculating employer contributions that should only be allocated to eligible employees. Eligibility requirements for employer contributions can differ from those for employee deferrals, so make sure to review the Plan Document.
- Consider retaining documentation supporting participants’ elections and implementing a review process to verify that participant deferrals are properly withheld from payroll and applied to the correct participant’s account each pay period.
- Consider implementing an annual review of total contributions by participant to help you verify that 1) no employee’s contributions exceeded the applicable IRS limits ($18,500 for 2018, or $24,500 with catch-up contributions), 2) all employees permitted to make catch-up contributions have reached the required age (50 years), and 3) only eligible employees received deferrals and/or employer contributions. While it is helpful to rely on a third-party administrator to help perform this analysis, remember that it is ultimately the plan administrator’s fiduciary responsibility!
- When testing contributions, one of the most common errors we identify is a difference between the definition of compensation in the Plan Document and the one actually used for calculating employee deferrals and employer contributions. Specifically, be aware of the most common compensation definitions utilized within Plan Documents (W-2 wages and section 3401 compensation). In addition to the differences between these two definitions of compensation, Plan Documents may also specifically exclude other types of compensation. These exclusions often relate to bonuses, severance pay, and other forms of incentive pay, so be sure to review the definition of compensation per your Plan Document before calculating any employee deferral or employer contribution.
- While the DOL rules set a maximum deadline for participant deferrals to be remitted to the plan of no later than the 15th business day of the month after the funds were withheld, the rules also require contributions to be remitted “as soon as reasonably possible.” Therefore, if contributions are generally remitted within 3-4 days after being withheld from payroll, anything longer could be considered late by the DOL. Late remittances generally require disclosure in the form 5500 and an additional schedule attached to the financial statements, along with corrective action by the employer to replace the “lost earnings.”
As summarized above, there are many challenging aspects related to the appropriate processing of contributions in an employee benefit plan. Our dedicated, employee benefit plan team has significant experience interpreting Plan Documents, advising plan administrators, and helping implement best practices for plan operations over our long history. If you have any questions regarding your Plan, one of our Delap team members would love to help you too. Please contact us today!
Other related blog posts:
- Employee Benefit Plan Guide for Plan Administrators – Part 1: Eradicating Eligibility Errors
- Top 3 Employee Benefit Plan Operational Violations