As the year-end and the final Form 5500 deadline approaches, 401(k) plan administrators and sponsors should take this time to review their plan documents to ensure their continued compliance with ERISA, Department of Labor and IRS compliance requirements. Neglecting to secure a Fidelity Bond, failing discrimination testing, making errors on your Form 5500 and other compliance mistakes can lead to hefty fines you could be deemed personally liable for if they negatively impact participants in the plan. Reviewing these common 401(k) plan missteps can help you identify compliance issues within your own plan before they negatively impact plan participants.
Summit CPA Group has merged with Anders CPAs + Advisors! Visit our website to learn more about our 401(k) process and pricing: https://anderscpa.com/401k-audits/
“We always say that you can outsource the responsibility, but you can't outsource accountability. And you as the fiduciary are responsible. Even though you have hired this third party and you have a contract and everything else, you're still ultimately responsible for whatever happens. So, if something goes wrong and the money gets dispersed to the wrong person, you could be held liable.”
Topics discussed in this episode include:
Episode resources
Narrator: Welcome to the 4 0 1 K audit CPA Success Show where we are 100% focused on helping companies across the United States prepare for their 401k audit. If you have 100 eligible participants in your 4 0 1 k plan, then this podcast is for you.
Kim Moore: Well, welcome everyone to this month's episode of the 401K audit c p a Success Show.
I'm Kim Moore, the audit director here at Anders that specializes in 401k plan audits, and I'm joined by Karen Hill, our audit manager on the team. So, good afternoon, Karen. Thanks for joining us.
Karen Hill: Good afternoon.
Kim Moore: Today's topic, we're going to talk about some things we've talked about before, but we're gonna kind of consolidate it a little bit and also offer some kind of new thoughts on some things that are happening.
And we wanna talk about the fiduciary responsibilities of a plan sponsor. And before we get going with this one, give a little bit of kind of a terminology just for those watching this. You may not be familiar with the terminology that applies to a 401plan. So a 401 plan sponsor is the company that sponsors the plan, so that's offering the plan to employees.
Is the governing individual, or could be more than one individual. So that's usually the president of the company, CEO, of, in a very big company. It could be the head of benefits or the head of HR. And it can be more than one person. It just depends on the company and the size and how they wanna structure things.
But that individual is responsible for usually starting the plan, determining the type of plan that's gonna be offered. They would be responsible for terminating the plan and also for making major changes to the plan. Third definition I wanted to give you is plan administrator. A plan administrator also works at the company.
All three of these are company these are the company itself or company employees. The plan administrator is an individual that has more day to day activities with the plan. So they're the individual usually that is making sure that everything's getting done for the plan. They're gonna do some of these compliance work that we're gonna talk about here in a minute.
They may be the ones submitting the contributions after every payroll. Again, depends on the plan and how it's structured. This can be one or more individuals again. So you've got the plan sponsor, plan trustee, and the plan administrator. All three of those individuals or entities or group of people are named fiduciaries to the plan.
And that's as defined by ERISA. ERISA, it's E R I S A. It's a governing set of legislation that Congress passed back in the seventies that governs benefit plans that employers offer to their employees. And it's, so, it's a defined role set of roles within a benefit plan and they are defined as fiduciaries to the plan, to the participants.
So that means they have to do things in the best interests of the plan participant, even if it conflicts with what's in the best interest of the company or the best interests of other benefits that they may be offering or other things that are going on at the company. They always have to do what's in the best interest of the participants for the plan.
And ERISA provides for, along with other regulations that have been passed since this time, violation of that particular portion of ERISA can carry both civil and or criminal penalties to those named fiduciaries. So if you're one of those individuals that I just went through and you do something that's in violation of what's in the best interest of the participants, depending on what it is and the severity of it, you could be subject to civil penalties, which would be fines and that would mean dollars that you would have to pay to reimburse and actually pay to the Department of Labor or the IRS to compensate for that mistake that was made. And then they, they would in theory, be able to compensate the impacted individuals.
Or criminal penalties. If it's very bad, what you're doing, you could go to jail and there have been folks that go to jail over things that they do in relation to the plan. We're gonna talk a little bit more about why, when that would happen, what the, what's weird enough to cause you to potentially go to jail, but that's why we we're doing this topic and those hope you talk about it a lot.
It isn't just a benefit that's out there and you pay somebody to run your bene- your 401k plan and that's all there is to it. There's actually congressional acts, legislation behind this and, and it can subject you as an individual to fines, penalties, and potentially jail time. And I would also mention those fines and penalties cannot be paid for by the company.
So you as an individual, personally, would be liable for that. And that would mean that they could come after your bank accounts and other assets that you might have to take care of those outstanding fines and penalties. Just wanna point out it's a real thing. It's not just a, you know, rule out there that, yeah, it says that, but they never do anything on it.
This is real. We go to, Karen and I go to conferences all the time, and they talk about especially fraud that goes on relative to the plan and what happens to the people that the DOL and the IRS investigate. And ultimately you know, what fines, penalties, and or jail time that they get. So with that Karen, I thought we would talk about some areas where this kind of comes into play, and the first one is compliance.
There are required activities that have to happen related to an individual 4 0 1 K plan. I thought we talked a little bit about those, some things that are, that are required per erisa. Do you wanna start talking about the bond, the fidelity bond?
Karen Hill: Sure. Oh, okay. Yeah. The Fidelity bond it's something that every plan has to have.
It's basically a, a protection for the employee assets and, and specific and contributions. And this is required by ERISA. So if you're told, which we've actually had clients who were told by service providers like, "oh, you don't really need to have the bond." Yes, you really need to have the, the bond. And the bond is supposed to cover 10% of plan assets up to $500,000.
So whichever is ...once you get up to that $500,000 limit, you don't have to keep, if you're 10% of your assets are over the five thou, $500,000 limit, you don't have to keep going up. There is a, the bond needs to be covered by an approved company. There is a surety listing of approved companies on the IRS, oh, not on the IRS website, sorry, on the treasury website.
That will tell you which ones you need to use. The bonds don't cost very much. And I, they can have something that's called an inflation guard that will protect you from not being in compliance if, say, you have a bond because and you had it at $20,000 because that covered you last year and then your assets went up and now you needed to have $25,000.
There's, you can get something that's that will an inflation bond that'll increase it without you having to call your, your company, the insurance company every year and say, "Hey, increase this." Because usually lots of times these, there, they'll be for maybe three year periods. Sometimes they're annual, sometimes they renew on every three years or every two years. So if you do something like have some sort of bond that goes over several years, the inflation guard might be a good thing to have. And like I said, they're not that expensive, especially when you take in consideration what the fines can be for not having the bond.
Kim Moore: Yeah, and it always amazes me. We get, we get clients all the time that tell us that their TPA advises 'em, "oh, you don't really need that," that they say that you don't really need it. I mean, it's federal law. You're, you're violating a federal law by not having it. And as Karen said, it's relatively inexpensive.
It, they're easy to put in place. There's hundreds of companies that offer 'em. So my recommendation is always just get the bond. You don't worry about it. We're going to cover this a little bit later, too. It is a hot button issue for the DOL. It, it gets reported on your form 5500 and they will check into it if they see that you're not you don't have a bond or they might be in looking at something else and they're gonna ask for a copy of your, your bond policy so that they can verify you have coverage.
And if you can't provide it, then you're gonna get a fine. It's clear cut. There's, there's no, there's no arguing out of that one, so just get the bond and you'll, you'll be, you're done and you don't have to worry about it, and one less thing you gotta worry about. Okay. You wanna go on to discrimination testing?
Karen Hill: Sure. Yeah. Discrimination testing is the second area of compliance that we generally think of when we talk about 4 0 1 K plans. And basically that there's several tests that are required to ensure that the plan is not unduly benefiting highly compensated employees. And there's also other tests like you, you wanna make sure that Well the, there, I don't wanna get too, too terribly detailed, but there's things such as, they wanna make sure that they're, that the contributions don't go over a certain limit, that they don't violate any of the IRS limits that are out there for various things.
It, it, it's just, there's, it's several tests. Five, six tests I think there are. They're usually co or they should be completed by your service provider. So whoever your record keeper may be, whether that's an ADP, a Fidelity and Empower, they, they will complete those tests.
They need to complete them early in the year. So you need to make sure they'll, they'll ask you for information. And that's usually it's, it's the census and you have to make sure that you understand what's required to be on the census. Don't just make assumptions because if you have the wrong information in there, it can make your test look like either it passed when it really didn't, or that it failed when it really didn't.
So it, it's supposed to be cover all of your employees, not just those that are in the plan. And they should hopefully give you some instructions and if they don't, ask them. To make sure that you understand exactly what information that you need do, specifically like when it comes to areas around compensation, because you can have, there's, as you know, you can have different types of compensation.
You might have your gross wages, there are wages there might be eligible wages. There's social security wages. Make sure you pick the right ones that, that they want in the census and ask them if you're unsure. So then after they, you give them the census and they run the test, you'll get the results.
You need to have these results back because if there any corrections need to be made, they need to be made by March 15th. Or two and a half months after, well, March 15th of the year, I'm sorry. Don't forget the two and a half month thing, but they need to be corrected by March 15th in order to avoid excise tax on any of the corrections that you need to make.
And the results will show, will tell you if there are any corrections that need to be made. The most common ones that we see, there's tests that are ADP and they're ADP tests and ACP tests. And basically what that's doing is making sure that your employees that are not highly compensated, that they're contributing at a rate...
I probably should say, I'm saying this backwards, that your highly compensated, aren't contributing at a much higher rate than your non- highly compensated.
So if that's happening, they'll want you to make refunds to those participants. But anyway, when you get the test, make you review the test, make sure you understand if there's any failures, what you need to do, review the options. Sometimes you, you don't have to, if, depending on how you structured your plan, you may not have to make refunds.
You can sometimes make what's called a qualified non-elective contribution to the non-highly compensated employees and that will get to bring your plan into compliance. If it's a safe harbor plan, then most of these tests are assumed to have passed. So that's another thing if you're, if you're constantly having to make corrections, you may be looking to that, but you know, kind of look at the options, you know.
Do you wanna do some refunds? Would it be better to do qualified non-elective contributions if that's something that your plan allows? Make sure that you take the corrective action and make sure you do it timely so you can avoid the excise tax. Ask your service provider any questions if you, if you're not sure exactly how all this is supposed to take place.
And, like I said, you can sometimes make it a safe harbor plan. Sometimes there's other things that you can do that you can discuss with your service provider to make sure that you don't have this issue in the, in the future. That's one of the things that's there's a lot of plans that have gone to automatic enrollment and also automatic escalation clauses in their plan where you, you're automatically enrolled in the plan unless you opt out.
And then also they will increase the deferral percentage every year. For those people who don't make an election, and that can help prevent the refund you having to refund money back to your highly compensated employees.
Kim Moore: Right. Yeah. The, I mean, this is a lot, and I know that's probably very confusing if you're not familiar with this topic.
I know, you know, if, if you, you know, you just think of it as called discrimination testing. The point of this is that the IRS doesn't want the owner of a company or the senior management in a company to be kind of taking advantage of the plan and using it to defer income because that's what a lot of folks are doing is putting in pre-tax income.
So they're not paying tax at the time that they're receiving the income from their employer. They're not paying tax, they're putting it in the 4 0 1 K plan as a pre-tax contribution. So no tax involved. And that, you know, obviously they'll have to pay tax later when they take the money out, but, but you're deferring that and the theory is that when you get ready to retire, you're gonna be in a lower tax bracket, so you'll ultimately pay less tax.
Well, the IRS doesn't, it's not so much they don't like it, but they don't want you to not be paying that tax. So they don't want the folks that are making a lot of money that would be paying a lot of tax to defer more than everybody else. The, the plan's there to benefit the employee base.
And to the extent that it's really only benefiting the senior management or the owner, or the owner and his wife or something like that, that's considered a discriminatory plan. That's why it's called discriminatory testing. And and the IRS doesn't like that. So that's where you get into these situations where if you don't have a lot of lower paid folks contributing, and only the higher folks are, higher paid folks are, it can end up in that discriminatory situation.
You know, one of the things I like to point out to, to those plan administrators, the day-to-day folks, the people that are gonna get impacted are primarily your higher paid senior management owner of the company, you know?
Those folks. And, you know, they don't want to hear that "I put all this money in pre-tax last year," cause you're gonna do this testing in the first part of the following year. So we're in 2023. So in 2022, let's say I put a bunch of money in my plan pre-tax. I didn't, didn't pay tax, didn't have tax withheld.
And then I come to find out in 2023, now it's failed this test and I'm gonna get a refund back of that money. Now I've got tax implications, and if you don't do it timely, I maybe even worse because I find out after I filed my tax return, so now I owe even more money back. I gotta go refile my taxes. So you can be causing a big problem for those folks in your company that are not the people you wanna get angry with you.
Not that it's the plan administrator's fault, but they will kind of hold them responsible. So it's something that it's very important to the plan. Obvious it's a compliance issue and you need to comply with the federal regulations. But if you are failing this over and over and over again, and a lot of companies don't wanna take the option of funding additional money into the plan, they just don't wanna do that, then that the, one of the only other options is to get these refunds.
And that can be problematic for those folks that get impacted by it. I would do what Karen suggested, go talk to your service provider and say, "Hey, we failed this test, thus the last two, three years in a row, what can we do so we don't have to fail it?" Now there's implications for that because usually that means you have, the employer has to put money into the plan.
But that may be preferable. I mean, go talk to the senior management folks involved and say, "look, if you will just take the plan this direction, then we can avoid this situation and you won't have to worry about your tax, you know, tax impacts to you personally." So definitely compliance issue, definitely need to take care of it, but there's also other kind of side things that we like to point out that that may help you.
The last area of compliance I was gonna bring up is the Form 5500. As we're taping this podcast, we're, we're real close to the first deadline for the 2022 plans that are calendar year plans for filing those 5500s. And so just wanted to, to bring that up. It's a required document. 4 0 1 k plans are required to file one every year.
So your provider should put that together for you. It's not something you have to do. It is a tax return, but it's kind of a specialty tax return. It's not anything you're gonna pay money with you, it's an informational return. And the IRS and the DOL use that information to just make sure that you're managing the plan well.
They're also are compliance questions on there that depending on how you answer those questions, that could cause a, you know, a flag to get tripped at either of those agencies. We mentioned the fidelity bond, that's a question that's on that 5500. So you know, you don't wanna lie, obviously, it's information you provided to the federal government.
So you don't wanna lie about that on, on that type of information. But if you're putting on there that, no, I do not have a bond because, honestly, you don't have one. They do search for plans that should have a bond that don't have one, and it may, you know, go into a file and then somebody's gonna call you and say, "Hey, you said that you don't have a, a bond for your plan. Here's your fine."
You know that that has happened. And that is kinda a hot button issue for them. So our, our recommendation here, let the provider put together the 5500. You don't need to worry about that, but before you file it, take a look at it. Make sure even just general things are correct.
The name of the plan, the EIN number of the plan. There's something called a plan number because you may have multiple benefit plans. So this may be plan number oh oh two or oh oh three. So make sure that's correct. Make sure if it's a final plan, it's marked final and it shouldn't be marked final if it's not final.
Look at those compliance questions, you know, make sure that that's accurate. Another thing we like to point out is there are participant counts on the second page of those forms, and that can trigger whether you need an audit or not. Obviously Karen and I are auditors so we're big proponents of audits, but most folks don't really wanna have an audit if they don't have to.
So be watching those counts. If your numbers are creeping up, and especially as they're getting close to a hundred, just be aware that there's probably an audit coming down the road in your future here. So another, another area that we always encourage people to, to take a look at, but make sure you review it, file it on time.
Don't file it late because that can impose penalties for your company. But it's really important: take a little bit of time and review it and make sure it's accurate because small errors can trigger work that you're gonna have to do with the DOL or the IRS and just, you know, not, not real work.
I mean, it's just a mistake that you made, but you don't wanna have to spend time trying to defend yourself with a regulatory body when it was just a mistake and you didn't catch it in your review. So take a little bit of time there.
The next batch of things I thought we would talk about is some activity that can happen with your plan. And some things that we think are a good idea for you as that named fiduciary to look into for your plan, be aware of, and maybe take some actions. So, Karen, you wanna start us off? First thing I listed was distributions. So you wanna talk about that a little bit?
Karen Hill: Yes, sure. Distributions. Distributions is something that a lot of plans will, they'll push off, off onto the record keeper or the service provider and say, "Hey, you take care of processing all these distributions." I, you know, the day-to-day, you know, processing of, you know, 10 employees or whatever, maybe within a month might request a distribution and all. They'll go to the website and online, go ahead and request the distribution and the service provider will take care of all that: processing it and issuing the check or sending the ACH or whatever it is that to, so that the participant gets their, their money.
But, despite the fact that you can go ahead and have your service provider do that, you shouldn't just not look at anything at all. You should still periodically review the distributions to make sure that there's nothing unusual with the distributions.
Make sure that they look accurate. Look at, if you see a distribution for somebody that is still employed and they took out their entire account balance, that might be a red flag that, you know, what happened here? Why, why is that happening? 'Cause usually most people who are requesting distributions are your employees that are terminated.
They're no longer active employees with your company. So you wanna make, might wanna review them on, I don't know, a monthly, quarterly, even at bare minimum annual basis to make sure that those distributions look right, that they're accurate. The other thing you might wanna do around the distributions is look at the controls provided by the service provider.
Your service providers should have a SOC one report that talks about the, their controls at, at the organization and surrounding all of their different transactions. Take a look at it, make sure there weren't exceptions with the distributions, the processing, when, when you look at that, just to make sure that everything is functioning as it should at the service provider.
Just, you know, if you have somebody at the service provider, ask them. I mean, it's something that should come up when you're, when you're first starting your relationship with the service provider. But just ask, what's the, what's the controls? How will you know that somebody who requests a distribution is actually who they say say they are?
Because ultimately, even though you assign the, the activity to the service provider, It's still your, the plan is still your responsibility. So you wanna make sure that there's, you know, there's always a chance that somebody could somehow hack into the plan and maybe request a distribution. And it's, it's not their money that they're, they're trying to get some somebody else's money and you would end up with a very upset employee and, That could cause problems for you.
Kim Moore: And there, there have been, there have been lawsuits against plans where the, the folks have lost money because of a fraud. And they have sued the, even though they may have been made whole for whatever happened, but they have sued the plan and they have won because they said you didn't have controls in place to prevent this from happening.
We always say that, you know, it's, you can outsource the responsibility, but you can't outsource accountability. And you as the fiduciary are responsible. Even though you have hired this third party and you have a contract and everything else, you're still ultimately responsible for whatever happens.
So if something goes wrong and the money gets dispersed to the wrong person, you know, you could be held liable. And there's, there's all kinds of situations. It doesn't have to be fraud. There can be situations of a divorce or an employee and their partner going through an, an argument or something and someone wants to get back at them, and they do it by doing something in their 401k plan.
So you have to be really careful. Another thing I would mention is we just did a, a podcast about cybersecurity. That was the one we did prior to this one. So if this is something that kind of peaks your interest or you're thinking that maybe that's something I should check out because, you know, as we mentioned in that podcast, it's been in the news a lot lately with all the artificial intelligence stuff that's out there.
Go check out that podcast as we go a little bit more in depth on that topic in, in that podcast I also had on here loans. Loans have a lot of the same issues that Karen already talked about for distributions because you're giving the participant money just like you would in a, in a distribution, it's just that they're gonna in theory pay it back.
One thing I wanted to mention about loans: we always encourage employers, whenever a participant requests a loan, if, if at all possible, stick a kind of a point in the process where someone talks to the participant or maybe even gives them something to read if, if that's the best you can do. Because there's a couple of things with loans: it's their money.
Most, most employers will tell us it's their money. I don't wanna tell 'em they can't access the money. And sometimes a participant. You know, they, a medical emergency comes up, or, you know, some other type of disaster happens at their home and they, you know, they need to get some repairs done or something.
So it's not a, you know, life happens and sometimes you need to get into that money. You don't have any other choice. But two things with regard to loans: when you take the money out, that money is not, obviously you're gonna get a check for that amount of money that, that the loan is covering, and that money is no longer in the plan.
The earnings that would accrue to that from whatever investments that you have now, you are gonna pay back some interest. So it's not a zero, but it's a much smaller gain than would normally happen in the account. And this is supposed to be a, a savings for retirement. The only way it works is that that money has to be in there over a long time and it has to compound.
So, you know, you, you're putting a dollar in, it's gonna have interest. And so now it's a dollar and a half. Well, now the dollar and a half's gonna make interest, and it just gets bigger and bigger and bigger. When you start pulling the money out. Even. Though you may repay it through and repay it and, and repay with interest, you're impacting that compounding.
So at the end of the day, when you get ready to retire, you're gonna have a lot less money available for retirement. So, you know, comment number one is make sure they understand the implications of taking the money out. It's not a checking account. It's not there to use just on a whim. It really, you should only take it out in, in just really dire circumstances where you really don't have any other options.
Secondly, though, people don't understand when they take a loan. If something happens to their employment, so they get terminated the place that they're working for, say they close a plant and so they're, they're terminated. It might have nothing to do with performance either. It could just be that the company's doing a downsizing and the person may have no idea that's coming, so they go, we see it all the time.
People take a loan, and then next month or two months later, Their position is terminated. At that point in time, in most cases, the amount of that money becomes immediately payable back to your 4 0 1 k plan. So, so let's say today, for whatever reason, I take a $50,000 loan out of my plan. I think everything's wonderful.
I'm gonna pay that back over, you know, five, 10 years, whatever it is. And then in three months I, I lose my position here and then it is immediately payable back to the plan. If you know, and you wouldn't have taken the money, if you could pay it back right away, that wouldn't, wouldn't make any sense.
So most people can't pay it back. That becomes a distributable event to that person. So they've taken the money usually because they need the money, they've got some event has happened. Now on top of that, that $50,000 is going to become taxable to that employee when they, when they file their taxes.
So yes, you got the $50,000 and you know, yeah, it's right that you would pay tax on it, but, but not when you're not expecting it and you've probably spent the $50,000. That's usually what happens is the people take the amount of money they need and it's already spent. It's gone. Now, I've lost my job.
So I don't have income coming in and I'm gonna have this big tax bill when I go to file my taxes because now I've got this extra $50,000 in there that's gonna get taxed. So and you know, it doesn't mean that people shouldn't take a loan, but it, I think having that step in there where that is explained to them is very important.
'Cause you don't wanna leave somebody in a bad situation or make a situation worse that, you know, if they've taken the loan because of some other hardship going on. So so again, I talked to your service provider on that front and see if they may have a booklet or something, or maybe that's the service they could provide.
You know, and maybe pay a little extra for it, but it would be worth it to benefit your employees and would show good faith to the regulators that you are trying to do what's in the best interest of your participants, which is of course your fiduciary duty, which is why we're having this conversation to begin with.
Next one's eligibility. Karen, you wanna talk a little bit about eligibility into the plan?
Karen Hill: Sure. First off, you wanna make sure you understand the provisions of the plan of the eligibility of eligibility. How, what makes somebody eligible for your plan and make sure you're following them. Firstly, is there an age requirement?
Some plans have age requirements of 18 or 21. Can't be any, can't be it, it can't be any higher than 21. That's, that's the maximum that's allowed. But if you have an age, an age requirement, and you might have employees that might not hit that age requirement you make, you wanna make sure that you're following that part of the, the provision.
Also, is there a service requirement? Some plans have service requirements, some plans don't. You can only go up to a year of service requirements. But sometimes with, with, if you, even if you have a time period, like a month, three months, six months, whatever it might be, are you counting that by elapsed time, which would be just as it sounds.
If you started work on July 1st and you have to have one month of service. That means August 1st, you're eligible. Or is it like sometimes with a year, is it service hours? So once you hit a thousand service hours, you're eligible for the plan. So you wanna make sure you understand what your plan says as far as eligibility for both service and for age, and make sure that you're following that.
And sometimes with the service requirement, especially if you don't have an hour hourly requirement, it can get really confusing when you're talking about interns or part-time people, or even seasonal employees, because those are people that you know, they might only be there seasonal. They might only be there for a few months of the year.
Maybe you won't, you just hire a whole, a lot of people in October because you know you're gonna be busy at the end of the year before Christmas, so you hire all those people. Or if you know there's an amusement park, they only hire people for the summer busy season. Are those people considered to be eligible for the plan?
So you wanna make sure that you're treating those people correctly. And sometimes with part-time, especially with part-time people who work over several years, they might actually hit a thousand hours because a thousand hours is not 40 hours a week, a thousand hours would be around six months of, of full-time employment.
So if you have somebody who's working 20, 24 hours a week for the whole year, they might hit that thousand hour threshold to be eligible for the plan.
Kim Moore: Right. And I'll, I'll just interject here with, with the Secure Act. And then we've got now Secure Act 2.0, which to spoiler alert that is probably going to be our next blog post. It's going to be about some of the provisions of the Secure Act 2.0.
That the rules around this are changing. It, it used to be pretty kind of freeform rules. You could set those eligibility rules pretty much however you wanted with the exceptions Karen outlined, like the age 21. But that's changing. And with the secure Act provisions now, you're going to have to start tracking.
And we're actually in the time period where you should already be tracking the hours for folks, not full-time. Full-time folks, it doesn't matter because they, they should be eligible just based upon what your plan document says. But for anybody not working full-time, so part-time seasonal, even interns, potentially, anyone that's not working a full-time permanent kind of schedule, you should be tracking their hours. Because the way the Secure act provisions work now, you're gonna measure over a period of time, and if they're hitting a certain number of hours over that extended period of time, then you're gonna have to offer them participation in the plan.
Which, you know, we've got a lot of companies that say, "oh yeah, all those part-time people though, they're excluded, they don't get any benefits, they're just over here." Well, not anymore. You know, that's changing. So you're gonna have, you know, and you don't have an, an option with that. That's a requirement.
Now another federal piece of legislation coming in. So, heads up. If this is an area that you're thinking uh oh, this, this might impact me. Tune into our podcast next month. 'cause we're gonna try and talk about the, the secure act and some of the implications, and that's a big one. That's one that we see.
You know, if you hire primarily salaried, full-time people, probably doesn't impact you. But for a lot of, of employers. They have part-time, they have seasonal, and so it's, it's an area that's you know, I think gonna potentially impact people, so...
Karen Hill: And, and this is an area that the service provider might handle for you, as far as sending out welcome packets or emails saying, "Hey, you're eligible." You wanna double, wanna check and make sure that they are handling that correctly. That they're, if, if it's one month of service, there's a one month service requirement that they're getting those emails out right at the right time and not waiting until they're there six months before they send the email and say, "Hey, you're eligible now," because that would be considered to not be in compliance.
Kim Moore: That would be considered a failure.
Karen Hill: Yep.
Kim Moore: Last area I had on the list was deferrals. These are the folks that are actually contributing to your 4 0 1 K plan. So they're active employees and they're having you withhold a certain amount out of their paycheck each pay period or for a period of time.
And then you're taking that money and you are putting that into their account at the 401k service provider. That sounds pretty straightforward. Okay. So they wanted me to withhold so much. I put it in their account, you know, how could there be a problem there? Unfortunately this is an area we, we see a lot of problems.
Karen Hill: It's a lot of problems
Kim Moore: And not that straightforward, unfortunately. There's something we call definition of compensation, which again, that sounds like, well, they got paid a hundred bucks, which that's a hundred dollars. What do you mean definition of compensation? Your plan document will actually have the definition of compensation. It will say what wages that you paid the individual are subject to this deferral.
And since most people use a percentage, it does matter. I mean, if, if I'm saying your wages are a thousand dollars versus a hundred dollars, and I've said take 5% of that, obviously those are two very different numbers. So we encourage people don't, don't just sit down with your service provider. You tell 'em what you want and then you just go down your path and you never look at your plan document.
They're very confusing, they're legalese. They're hard to read. But ask your service provider or if you have an auditor, ask your auditor to sit down with you and go through what are your plan provisions. And this is a really key, important part of it is definition of compensation.
One of the areas we see most often. Is things like bonuses and commissions. Your plan document may say all compensation. It will be worded differently than that, but just for simplicity, let's say it says all compensation. You are giving some of your, you know, highly motivated folks a bonus and you feel like, Hey, I don't, I don't wanna, I have to withhold taxes.
I don't have a choice, but I'm not gonna withhold any 4 0 1 k out of that 'cause I want 'em to get the maximum benefit outta that bonus. I want 'em to really enjoy it and feel like, "boy, this company really likes me. I got something nice," and I wanna give 'em the maximum bonus. I get it. We all understand, we all wanna, you know, if we get a bonus, we want the most out of the bonus, but that would be a fail.
If your plan says all compensation, that includes bonuses, that includes commissions. Now there are ways in your plan document to specify that those things are excluded or they can have their own election which would allow the employee then to say, "no, don't withhold on that bonus. I, I'm 5% all the rest of the year, but on that bonus, no, just don't withhold anything." Again, gotta be documented.
Can't just, can't be a verbal, "you know, well, they told me in the hall," you gotta document it. You gotta keep the documentation. But that is an option. But you have to specify that in your plan document. So it's an area that you, you spend a little bit of time, make sure that you understand what the plan document says, and you're following the plan document. If that's not what you wanted, then you need to change the plan document, because you always have to be right in sync with the plan document.
Other thing is that their employees can change rates. So they can say, "Hey, I was 5%. Maybe I'm making a little bit more money now, or, I'm in a different phase of life and I now want you to withhold 10%," or go the opposite direction.
"I was withholding 5%. I, I wanna stop my contributions entirely. Something's come up and I, I need that money." Whichever way it goes, you need to, of course, make sure you have a plan in place so that you're gonna get those changes timely. They're gonna get input into payroll timely. So I'm not telling you stop my contributions, and six months later you stop them.
You need to be stopping them as soon as possible after the instruction comes through. Those are the main areas of deferrals. There's, there's a lot of other stuff. But you know, that's probably the, the biggest thing. I know we've, we've talked a lot here. I'm gonna run through just real quick.
We've talked a lot about some of these things I had next on the list, but DOL hot button issues. We talked about cybersecurity a little bit. DOL is really encouraging everyone to a cybersecurity policy for your 401k plan. Again, more information available in last month's podcast. So go check that out if you're interested.
Late contributions. The, the way the regulation reads, you need to submit those withholdings that you do out of individual payrolls out of their payroll run for the individual. You needed to remit those to the plan as soon as administratively feasible, whatever the heck that means, right?
Key there is consistency and do it as as quickly as you can. So if that means you submit it same day as the payroll, that's great. If it's like next day, that's okay, but don't have the contribution timeliness kind of all over the place. It's two days here, it's 20 days the next time it's three days, and then it's 60 days.
And those ones that are, what the DOL will do is come in and look at the smallest amount of time and everything else will be considered late. And then you're gonna have to pay a fine and do make up the lost earnings because you, you didn't allow those funds to get into the plan accounts to start earning the, whatever the earnings that would accrued based on the investment choices that, that the individual made.
So area we see all the time that, that is not unusual as, as a, you know, a problem. One other thing I would say on the contributions, you know, I mentioned at the very beginning of the podcast about there being a criminal penalty so you could go to jail. This is an area where you can go to jail. Not so much that you had late contributions, but the.
The most common error where someone can be sent to prison is that they were withholding money out of their the payroll. So instead of paying you your total salary, they withheld the amount that you told them to withhold, and that should have gone into their participant account and instead, the owner of the company or senior manager was using the money.
So they held onto it for a long time and maybe two, three years down the road, they were intending to put it in the account. Or they just took the money and they, they were using it for their own personal means. And we've, you know, there's all kinds of horror stories where they're out buying yachts and doing vacations and all that kind of stuff.
Obviously that kind of action is gonna land you in prison. The DOL finds out about it and they can prove it. You're going to jail. Full stop. So, Be very careful that the way the DOL looks at it, that money was never yours. That was the employee's money. You were legally required to pay that to them for work that they did for you.
Instead, they've asked you to take that money and put it in their 4 0 1 K plan account. That was never your money. So, so don't, you know, just don't mess around with that. Take the money, put it in their account and be done with it. The last thing I'll mention, well two, two things I'll mention here. High fees and not monitoring your investments.
We've talked about those things in prior podcasts, so I'm not gonna go into a lot of detail, but you should have a process in place to monitor the fees that, that are being charged to your participants and also the selection process that you use for the investment lineup that goes into the plan. Not the individual selections.
I may have 20 investments I can choose from as a participant. I pick one and it loses money. Well, that's on me. That was my choice. Maybe I made a bad choice, but the fund lineup is the fiduciary's responsibility. So get an investment advisor and utilize their expertise. We've talked about that in some previous podcasts.
So again, check out our, our previous podcast for more information there. And the last area I was gonna mention, which again, we have talked about before. There are voluntary correction programs offered by both the Department of Labor and IRS, and those actually are in the process of being expanded again, as part of that secure Act 2.0, there's gonna be additional offerings.
So if you find out you made a mistake, I'd say number one, call either the Department of Labor or the IRS, depending on which area is impacted. I know it's federal government. I know nobody wants to call federal government. And you might have to wait on the phone a long time 'cause they're short staffed.
But they're there to help you and they want, they understand this is complicated and they know people make mistakes and they want what's best for the participants. So they will talk to you and help advise you on how to fix problems that have occurred. And a lot of the ways to fix it is through these voluntary correction programs.
So a lot of information out on the website. Again, we've talked about it in prior podcasts, so check those, both of those sort resources out. But don't be afraid to call either IRS or DOL. They really can help you. So, so don't be afraid of 'em. They're, they're there, you know, they're there to help.
Karen Hill: And the cost to correct is much less than the cost of a fine. I mean, we've seen-
Kim Moore: Absolutely.
Karen Hill: If you have late contributions, now, as long as they're not grossly late. But if you're, you know, maybe a week late because, oh, so this happened and we just, we didn't get around to it for a week. You're talking about a few dollars of earnings that you'll have to add to the contribution to make it whole.
So it, it's, it's not something that you just go, just put it to the back burner. Just go ahead and, and do the, the correction, you're, you're really, they. What they wanna see that is if you do make a mistake, that you go ahead and fix it.
Kim Moore: Right. Right. And the, you know, best faith efforts matter in this, in this case.
Karen Hill: Yes.
Kim Moore: Pretending, you know, saying, well, I didn't know any better. That will not work.
Karen Hill: No.
Kim Moore: We can tell you the DOL, IRS, but that Mm. They're not even gonna listen to that argument. But if you're gonna say, well, I knew it was wrong and I was in the process of fixing it, that they will listen to, so.
So yeah, don't, don't be afraid to, to check out those resources. And or could just give them a call. They, they would be happy to help. I'm gonna throw out here my personal not my personal, but my work email address. It's the letter K, and then m o o r e at Anders. It's a n d e r s cpa.com.
Again, K Moore at Anders with an s, cpa.com. If any of these topics sparked your interest, you'd like to talk a little further about it or you'd maybe like a copy of some resources we may have, or if you have some ideas for future podcasts, we'd love to hear from our listeners, so don't, don't hesitate to reach out.
Send me an email and I'll get back to you and try to either answer questions or, or talk to you about future topics. With that, Karen, any, any last thoughts before we wrap up?
Karen Hill: No. Nope. Nothing I can, can think of other than, like I said, if. Correct any errors that you may realize that you made. If you make a mistake. Really, they want you to do that.
Kim Moore: That's what they want. Yeah. And, and read your plan document, I think would be another thing. I would, my, my last posing comment there is read your plan document, make sure you're following it. And if that's not what you wanted, you've got the opportunity to change your plan document and make sure that you're, you're actually following what the document says going forward.
With that, I think we're gonna wrap up. Stay tuned. Next month we're gonna go over some upcoming changes with the secure Act. The 2.0 that's coming up. Thank you very much for listening, and we'll catch you again next month.
Narrator: Enjoy this podcast? Visit our website at anderscpa.com/401k to get more tips and strategies for achieving 401k audit success. We are here to be a resource with ever-changing rules and regulations.