How to Avoid Common Retirement Plan Administration Errors

As a plan sponsor, you have multiple responsibilities, and making sure your retirement plan stays in compliance throughout the year is critical. Here are some common mistakes and how to avoid them:

Mistake: Late Deposits of Employee Elective Deferrals

U.S. Department of Labor (DOL) rules require plan sponsors to remit participants’ salary reduction contributions to the plan “as soon as reasonably possible,” meaning as soon as these amounts can reasonably be segregated from their general assets.

Although there is no specific date tied to “as soon as reasonably possible,” there have been cases in which DOL audits have found remittances more than three business days after the employer would have paid the employee funds to be late. In some cases, given the availability of electronic funds transfer capabilities, one business day was considered late.

For a small plan, defined as a plan with fewer than 100 participants (including all plan participants, not just actively employed participants) as of the first day of a plan year, the DOL requires participant contributions and loan repayments to be remitted by the seventh business day following the date the amount is deducted from the participant’s pay.

Mistake: Failure to File a Form 5500

Most plan sponsors are required to file a Form 5500 annually. Not doing so can trigger a letter from the IRS or DOL, as well as significant late-filing penalties from both regulators. The IRS penalty is $250/day up to $150,000; the DOL penalty can be as much as $2,529/day with no maximum.

Consider setting up a calendar alert for your filing deadline.

Mistake: Not Correcting a Failed ADP and/or ACP Nondiscrimination Test

Sponsors of 401(k) plans must ensure their plans don’t favor highly compensated employees over non-highly compensated employees through annual actual deferral percentage (ADP) and actual contribution percentage (ACP) tests if the plan includes an employer matching contribution. While 403(b) plans are not subject to the ADP test (they must instead comply with the “universal availability” rule), they are subject to the ACP test if they provide for an employer matching contribution. A plan failing the test has 2.5 months (six months for plans with an eligible automatic contribution arrangement) after the plan year being tested to make corrections or risk a 10% excise tax on the correction amount.

Mutual of America can suggest strategies to help avoid these common errors. If you have questions, please contact Mutual of America Account Representative Steven Ortiz at [email protected].

The articles and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. Consult your attorney, accountant or financial or tax adviser regarding your individual situation. The tax information contained herein is for informational purposes only. You should consult your financial adviser or attorney regarding your individual circumstances.

Steven Ortiz is the Vice President of National Accounts at Mutual of America Financial Group.