Managing employee benefit plans can be a challenge. Benefits can be complicated. If you make mistakes, it could mean costly fines or even criminal punishments.
Here are common employee benefit plan mistakes and advice on how to avoid them.
TIMELY DEPOSITS OF PARTICIPANT DEFERRALS
Department of Labor rules require that the employer deposit participant deferrals as soon as they can reasonably segregate from the employer’s assets as outline below:
- For a small plan (fewer than 100 participants): The plan sponsor has 7 business days following when the sponsor withheld the deposit amounts.
- For a large Plan (100 or more participants): The general rule is that the deferrals be deposited as soon as is reasonably possible after payday. However, in no event can the deposit be later than the 15th business day of the following month.
The DOL is focusing on the earliest time the funds can be reasonably separated. If the employer can separate and deposit the contributions prior to these deadlines, they must do so. They are looking for deposits made with at least the same frequency and timing as your payroll tax withholding.
Please be sure to deposit employee deferrals and loan payments within the appropriate timeframe. When late deposits occur, lost interest must be calculated on each late contribution and loan payment and deposited on behalf of the employees involved. Also, there is a 15% excise tax on the interest amount which must be paid along with filing a Form 5330. Late deposits must also be reported on the 5500 Tax Form.
ENROLLING PARTICIPANTS IN EMPLOYEE BENEFIT PLANS
Another common error when managing employee benefit plans is the failure of the employer to inform an employee of his eligibility to start contributing to the plan when he or she meets the plan’s eligibility requirements.
Fortunately, the Internal Revenue Service (IRS) has provided relief for these errors via the Employee Plans Compliance Resolution System (“EPCRS”). The EPCRS is a system of IRS approved corrections that allow sponsors of retirement plans to resolve various types of failures and still continue to maintain the plan’s tax-favored status.
Usually contributing equal to either a 50% or 25% of the missed deferral (plus any missed matching contributions and earnings) may correct the error. However, if the error is caught within the first 3 months, this corrective contribution is not necessary. Instead, you must provide a notice to the affected participants within 45 days of the date on which the proper deferrals started occurring and provide the enrollment materials immediately.
MAKING DEPOSITS TO THE CORRECT SOURCES AND PARTICIPANT ACCOUNTS
When entering your deferral and employer contributions, it is imperative to make sure the money is going into the correct participant’s account and the correct source of money.
It is very easy to make a deposit meant for Jane Doe into John Doe’s account. When this happens, it takes extra time to fix the mistake. Often these mistakes are not identified until many months later when working on the annual valuation. In the meantime, the wrong participant could have had a loss to the account, or have been issued a distribution. When this happens, the correction from one account to another cannot be made and the plan sponsor will need to make the correct participant whole by contributing additional funds.
Additionally, when funding the employer contribution such as a profit sharing, match or safe harbor, it is important to be sure to deposit the amounts into the correct source, or “bucket” of money. For example, a profit sharing contribution that is entered into a safe harbor source, or vice-versa, creates complications when balancing assets at year end. If a terminated participant is issued a distribution and money is in the wrong source, the participant may be paid out incorrectly based on vesting. If funds that are on a vesting schedule are deposited into a source that is 100% vested, the participant is overpaid. The employer will need to pay additional funds into the forfeiture account to correct the error.
AVOID MISTAKES IN YOUR EMPLOYEE BENEFIT PLAN
In summary, these types of employee benefit plan errors will cost the employer additional costs in fees and corrections. You should establish internal procedures for checks and balances when making your contributions and enrolling participants. We suggest you also check with your fund company, as they may have resources to assist with your enrollment and deposit process.
Contact Watkins Ross if you need help deciphering your employee benefit plan.