The Top Mistakes Plan Sponsors Make: Part 2

The Top Mistakes Plan Sponsors Make: Part 2

By Ed McClure, CFP®, PPC®

Back in 2021, the Employee Benefits Security Administration (EBSA) acquired $1.9 billion in qualified retirement plan violations and other enforcement actions. This means that staying current on plan requirements and preventing costly mistakes is more crucial now than ever for plan sponsors.

In Part 1 of this series, we shared the top three investment mistakes made by retirement plan sponsors. In this article, we explore the biggest plan administration and operation mistakes and provide insights on how to avoid these pitfalls so your retirement plan remains compliant and effective.

1. Not Choosing the Best Plan Design to Meet Your Objective

Choosing the right plan for your business is one of the toughest decisions retirement plan sponsors have to make. Because of this, it’s one of the biggest areas where we see clients consistently make mistakes. You may feel rushed into making a decision because either you or your employees want a plan sooner rather than later, but taking your time to ensure you choose a plan design that meets your objective is the best thing you can do.

In choosing a plan, you will have to navigate questions around the following:

  • Employer vs. employee benefits: Who is your target participant? Do you want to include all employees or only upper management? 
  • Defined benefit vs. defined contribution: What type of benefits can you afford to provide?
  • Tax-deduction vehicles: There are options to skew deductions to benefit owners, executives, and key employees.
  • Attract, reward, retain employees: How can you best balance the needs of the company with the desire to provide competitive benefits to your employees? 

Designing the right plan is an essential part of setting yourself up for success. The last thing you want is to make a hasty decision that leaves you committed to employee contributions you can’t afford, or struggling to maintain compliance because the design is so complicated. 

Avoid this issue by doing your due diligence up front and choosing a plan design that meets your long-term objective. Working with a qualified plan advisor can be a great place to start.

2. Misunderstanding Employee Eligibility 

One of the biggest mistakes we see with retirement plan sponsors is misunderstanding which employees are eligible to participate in the plan and when. This can be a big issue when it comes to maintaining ERISA compliance since plans have to cover a certain number of non-highly compensated employees to be considered nondiscriminatory and avoid penalties. 

As a plan sponsor, you are probably familiar with the rule that states most employees become eligible to participate in a qualified retirement plan after reaching age 21 and working for at least one year (1,000 hours)

But were you aware of the legislative change that significantly updated plan eligibility requirements in 2019? The SECURE Act now requires that long-term part-time employees, those who work between 500-999 hours in the last three consecutive years, be eligible to contribute to a qualified plan. As of January 2021, plan sponsors are required to track part-time employees’ hours to ensure all eligibility requirements are met.

A good way to avoid this mistake is to consult your plan documents when making decisions about employee eligibility, especially as it relates to different types of plan contributions. For instance, long-term part-time employees are generally only eligible for participant deferrals but not employer contributions. Be sure to take these requirements into consideration when determining eligibility. 

3. Not Following the Plan Document Compensation Definitions

Another common mistake comes from misinterpreting the compensation definitions, which in turn can cause mistakes in how much (or how little) is allowed to be contributed by the employer or the employee. For instance, in reading the plan documents, you may find that eligible employees are allowed to defer up to 10% of their compensation annually. But what does compensation mean in this instance? Does it include bonuses? Stipends? Overtime? Commissions? 

Most commonly, compensation consists of three types of income:

  • Wages and salaries
  • Payments for professional services
  • Payments for personal services (tips, commissions, fringe benefits, etc.)

Put simply, you cannot rely on what you think the word “compensation” means. Instead, you must thoroughly review and understand your plan’s definition of compensation as well as what type of compensation each employee receives.

4. Inconsistent Remittances of Employee Deferrals

Like most aspects of a qualified plan, there are many rules and regulations regarding how and when employee deferrals should be deposited into the plan’s trust account. Plans with fewer than 100 participants have seven days to make the remittance, while large plans are expected to deposit the funds as soon as possible after payroll (typically within two days). 

Due to the different timelines for remittance, many plan sponsors don’t realize the importance of consistent employee deposits. Whichever remittance time frame applies to your plan, it’s critical that the same turnaround time is used consistently for every deferral. Taking seven days to deposit some employee deferrals but only one day for others is the quickest way to be flagged by the DOL for an audit. It may not even be a large amount of money in question, but if you’re ordered to correct the mistake, it could result in fines, penalties, and manpower that significantly increases the cost.

It’s crucial to coordinate employee deferrals with both payroll personnel and plan sponsors to ensure remittances are both timely and compliant.

Safeguard Your Plan

Working through the complexities of retirement plan sponsorship helps you avoid these pitfalls that could lead to noncompliance with the IRS or DOL. With over 25 years of experience, we at McClure Wealth Management are dedicated to assisting clients in understanding and fulfilling their responsibilities as plan sponsors. If you have questions or concerns regarding your retirement plan, reach out to us at (760) 607-0611 or email [email protected] to set up a consultation. We’re here to guide you through the process to stay in compliance with a successful retirement plan.

About Ed

Ed McClure is a CERTIFIED FINANCIAL PLANNER™ practitioner and founder of McClure Wealth Management. With over 25 years of experience, Ed works with business owners who want to maximize their retirement plan benefits, businesses that need help setting up and managing a 401(k) for their employees, and families who want guidance while planning their futures. He is known for simplifying complicated and intimidating topics and making wealth management concepts easy for others to remember and understand.  

Ed has established himself as a trusted resource for business owners and individuals, and his mission is to help his clients achieve the financial independence and well-being they deserve so they can give their time and energy to the people and things they love. He has a bachelor’s degree in finance from the University of Illinois. In his spare time, Ed conducts financial workshops for the Just In Time for Foster Youth organization, which helps equip young men and women as they come out of the foster care system. He also loves to travel and spend time with his favorite people. To learn more about Ed, connect with him on LinkedIn.