Retirement Plans – Common Operational Deficiencies

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Performing self-audits on retirement plans can avoid common deficiencies found by the IRS and Department of Labor. The most frequent deficiencies are:

  1. Late deposit of deferrals. Many employers do not realize  deferrals must be deposited as soon as reasonably possible after the pay date.
  2. ERISA violations. Section 404(c) of ERISA permits retirement plans to transfer responsibility and liability for selecting investment options to participants if certain requirements are met. Many companies believe they will be afforded protection for participants’ investment decisions under this provision. However, we found most plans do not comply with the requirements of §404(c). 
  3. Employees versus independent contractors. For tax purposes, there are strict rules to determine whether a worker is an employee or independent contractor. The IRS looks at many factors when making a determination. If a company hires an independent contractor and the IRS later reclassifies the person as an employee, the company can be hit with a tax bill for unpaid taxes, interest, and penalties. The company may also be liable for state taxes, unemployment taxes, and employee benefits, such as retirement plan contributions.
  4. Services performed through a professional employer organization (PEO). Hiring employees through a PEO for long periods of time may not eliminate an obligation to make retirement plan contributions for these workers.
  5. Improper correction method. Employers can correct compliance problems in qualified plans without requesting advance IRS approval. However, they must use the proper correction method. 
  6. Default account. Plans often specify a money market account or a GIC (guaranteed investment contract) as the plan’s default account. The fiduciaries for 401 (k) plans must prudently invest non-directed participants’ accounts, even if the plan document provides for a “default” account.


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