Employee Benefit Plans (EBPs), are highly regulated by both the Department of Labor (DOL) and the Internal Revenue Service (IRS). As with anything, simple mistakes can happen with the operation of your plan. Three of the most common errors made with EBPs are: over-reliance on third-party administrators, not following the plan document on the definition of compensation and timely remittance of employee withheld deferrals.
#1: Over-Reliance on Third-Party Administrators
The landscape of EBPs today consists of the use of a third-party administrator (TPA). There are many benefits of using a TPA; however, the benefits do not eliminate the plan administrator’s fiduciary responsibility over the plan. It is important to remember that with the added benefit of a TPA, comes the tendency to over-rely on the TPA as a “catch-all” for monitoring the plan. Even though a TPA is in place, the plan administrator is still responsible for maintaining the plan’s internal controls and ensuring that all of the provisions of the plan document are being followed. The plan administration should keep minutes of their routinely held plan meetings, during which, amendments can be approved, report reconciliation findings of both participant records and plan statements of investments can be reviewed, and plan documents can be reviewed.
#2: Not Following the Plan Document on the Definition of Compensation
The plan is to operate in accordance with the plan document that is established—it is the road map for how the plan is to function. One of the plan provisions spells out the definition of eligible compensation. Often these plans are the TPA’s pre-approved prototype plan to save time and money, but are customized by the options selected by plan administration during setup. It is important to ensure that you follow the definition of eligible compensation when calculating employee and employer deferrals.
Eligible compensation can be defined in different ways. It is important to remember to always follow the plan document because it is the contract that was approved by the IRS and what was selected by the plan’s administration.
Most deviations from the plan document are honest mistakes, but can lead to costly errors for the company sponsoring the plan. For example, if the plan’s compensation includes bonuses and during the year bonuses were excluded in the calculation of deferrals, the DOL would rule that the error needs to be corrected. Error correction would require the employer to make up a portion of the missed deferrals, along with, depending on the nature and timing of the error, a portion of lost earnings that those deferrals would have earned. This could be even more costly if there was an employer match during the plan year.
#3: Timing of Remittance of Employee-Withheld Deferrals
The DOL states that the plan must remit employee funds to the custodian of the assets at the earliest possible opportunity. If an employer has remitted employee withheld deferrals in the past within three days, then that is the standard by which the DOL requires the employer to remit as the earliest opportunity and anything later than that could be deemed as “late”. This error can also lead to having to make up lost earnings.
It is important to remember to follow the plan document because that is the contract set for the plan and is the approved road map by the IRS. Not over-relying on TPAs can help to catch errors quickly. Follow the plan documents and check that deferrals are using the correct definition of compensation. Monitor the timing of your remittances to ensure a timely consistent pattern is set. Simple plan mistakes can be costly, but closely monitoring the plan and internal controls can help to prevent those costly corrections.
Hawkins Ash is here to help answer any questions you may have and provide any guidance you may need.