Helping Plan Sponsors Steer Clear of Compliance Missteps
Many larger plan sponsors engage a third-party administrator (TPA) or recordkeeper to help them administer their plan in compliance with the tax rules and the plan administrator responsibilities outlined in ERISA. But, as an advisor, who may have smaller plan sponsor clients, you can provide significant benefits if you know common missteps, and how to correct and prevent them.
As an advisor for smaller plans, your ongoing support to promote plan compliance can include:
- Education about the plan sponsor administering a plan versus the services that can be provided by a third-party administrator or recordkeeper
- Helping build due diligence procedures for selecting and monitoring plan investments, selecting service providers, and benchmarking plan fees
- Discussing internal controls that will help identify and correct plan missteps
- Introducing resources like the IRS 401(k) Plan Checklist
- Reviewing investment metrics that may point to compliance concerns and facilitate a meeting with the third-party administrator
- Educate plan sponsors about common mistakes discovered during DOL and IRS examinations
- Identifying potential corrections service providers (e.g., ERISA attorney, third-party administrator) if plan errors occur
The plan sponsor’s failure to maintain plan compliance may result in the need to self-correct, if available, or worse, such as the discovery of an error on an audit or participant lawsuits.
Plan participants and other plan fiduciaries have the right to initiate lawsuits to correct fiduciary wrongdoing such as late deposits, failing to review and monitor service provider fees, late participant fee disclosures, payment of excessive investment fees, and filing a late or inaccurate Form 5500. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of their fiduciary responsibilities. The DOL also has authority to assess penalties and initiate lawsuits. Prohibited transaction penalties under ERISA and excise taxes apply. Plan sponsors may be required to make additional corrective contributions or distribute excess contributions to correct certain plan errors, such as not automatically enrolling eligible employees, failure to make deferrals based on an employee’s election or not allowing employees to make a salary deferral election, not distributing annual RMD payments when participants reach age 70½ or die, or applying an incorrect definition of compensation when calculating deferrals or employer contributions. A plan may be disqualified if there is substantial non-compliance with the qualification requirements set forth in the Internal Revenue Code.
Building a solid foundation for plan operations and monitoring plan activity are key to operating a plan that is in compliance. The IRS provides examples of internal control procedures on its web site. These internal control procedures are designed to help plan sponsors identify and prevent compliance errors. Generally, when a misstep has occurred, a plan sponsor must restore the plan and the participants (and beneficiaries) to the condition that would have been, had the error not occurred. Often, this means that the plan sponsor will need to make an additional contribution (including earnings) to the plan to correct the error or distribute excesses. The Department of Labor (DOL) states that procedural due diligence is key to meeting ERISA’s high standards of fiduciary conduct, including following a prudent decision-making process regarding plan investments and plan administration. Both the DOL and the IRS provide compliance tools and corrections programs to help plan sponsors identify and voluntarily correct plan compliance errors. The best time to review compliance procedures and discuss corrections is before a plan audit.
Even with support, compliance missteps frequently occur. But, they are preventable. As an advisor to retirement plans, it is worth your time to help plan sponsors avoid mistakes and alleviate exposure associated with errors and missteps.
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Neither New York Life nor its agents or affiliates provide tax, legal, investment, or accounting advice. Plan sponsors should speak to their own tax, legal, or investment advisor or accounting professional regarding their specific situation.
The information contained herein is general in nature and is provided solely for educational and informational purposes.
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