In February, BenefitsPro reported that the U.S. Department of Labor “collected $1.69 billion in fines, voluntary fiduciary corrections and informal complaint resolutions, a 33 percent increase over 2012’s $1.27 billion tab.” Then in March it reported evidence that the DOL is cracking down on employers that violate the laws governing 401(k) plans, including the Employee Retirement Income Security Act, or ERISA.
That’s some scary information for human resources departments charged with selecting and managing companies’ 401(k) plans. Still, if you’re doing everything right, you don’t need to worry. But how do you know?
Pay attention to contributions
“Participants may elect to have their employer contribute a specific amount to the plan in lieu of receiving it in cash as wages. In order to satisfy the requirements of section 401(k), the plan must satisfy the Actual Deferral Percentage (ADP) test,” says Wayne Connors, founder and chief portfolio strategist at 401K Investor. “The ADP test requires that the deferral of income into the plan by highly compensated employees be proportional to that for non-highly compensated employees.” This limit is $17,500 as of 2013.
Keep track of plan assets
“Did your plan comply with the requirement that all plan assets are used for the exclusive benefit of employees and their beneficiaries? Check that none of your plan’s assets were diverted for other purposes,” says Connors. “The assets are held in the plan until distributed to the employees or their beneficiaries according to the plan’s provisions. The plan must be maintained for the exclusive benefit of the employees and their beneficiaries. Section 401(a) of the Code sets out the requirements that a plan must satisfy in order to ‘qualify’ for favorable tax treatment. If a plan fails the ‘exclusive benefit’ test it may lose its exemption from income tax.”
Develop an oversight strategy
“A more practical and proactive approach is to have Plan Fiduciaries (with the help of hiring independent qualified retirement consultants including ERISA attorneys) set up proper oversight through policies, procedures, committees and annual reviews which will help ensure compliance to the best of their ability and usually catch any major issues,” suggests Deborah Castellani, a principal at OTB Strategic Consulting.
“Annual plan reviews should be conducted by internal auditors or external consultants to ensure ‘fresh eyes’ review the plan and that people are following policies and procedures. This type of review is in addition to the very limited scope of the 5500 audit,” she says. “Also, to help avoid any conflicts of interest, committees and possibly Board members in charge of the retirement plans should be rotated every 2 to 3 years to ensure that, on a regular basis, a different person is providing guidance and oversight.”
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