They say that no good deed goes unpunished. You establish a pension plan to help your employees provide for their retirement, and in so doing, you create a potential minefield of regulatory booby traps and compliance trip wires that can wind up costing you extra money in plan penalties. Unlike many other areas of your business, in the area of pension plans you have both big brother (the Internal Revenue Service) and big sister (the Department of Labor) looking over your shoulder to make sure your doing things correctly, and with an uptick in the number of government audits, it behooves you to establish a regular compliance review of your pension plan.
There are many places where your plan can be out of compliance, but we’ll just touch on some of the bigger ones here:
Failure to Comply with/Update your Plan Document:
Companies grow. We get it. That’s a good thing. You implement new practices, offer new incentives, offer more flexibility to attract staff … all the things you should be doing to grow a successful business. Great, but when was the last time you looked at your plan document to see if those changes have been incorporated into your pension plan administration. When your making payroll and human resource changes, you need to make sure that you consider how those changes could potentially impact the administration of your pension plan. We suggest that every few years you review your pension plan to see if you are operating in compliance with your plan documents.
Incorrect Definition of Compensation for Contributions:
Within your plan document, you can define the contribution base on which employee and employer contributions are made. Many plans use a catch all definition of “all compensation.” Sometimes, however, one-off type things happen; such as stipends, bonuses, vacation and sick pay-outs, etc., which are considered compensation, but you may not handle them correctly from a pension calculation perspective. This can result in an under withholding of staff contributions to their pension plan, and unfortunately, it can be your responsibility to make them whole (plus investment returns). Make sure you understand how compensation is defined, and your payroll and fiscal staff are informed, so that they can insure that the correct contributions are made.
Not Making Timely Deposits of Participant Contributions:
Each pay period, you withhold money as directed by your staff to make pension contributions. You have a fiduciary responsibility to ensure that those funds are deposited into their pension account in a timely basis. If you read the regulations, they state that contributions must be made as soon as they as it is reasonably possible to segregate them from your assets, but in no event should this be more than 15 days. Spoiler alert … 15 days is not a safe harbor. A safe harbor of 7 business days does exist for small plans with less than 100 participants, but for those of you with more than 100 participants, you need to get it in quicker. For those of you that use a payroll service, as soon as the payroll is processed, you know the amount of the required pension contribution and you know who had how much deducted. That sounds like reasonably possible to segregate to me. The reality of the situation is, you should be able to contribute the funds within 1 or 2 business days of the time your payroll is processed. Failure to do so could require you to reimburse the plan for any lost income your employees had.
Not Following Eligibility Requirements:
Your plan document spells out when an employee is eligible to participate in a plan. This considers new employees as well as employees who left your company and have returned. In determining this, such things as hours worked, years of eligible service, and other factors come into play. You need to have a tracking system in place to appropriately measure these factors and you need to effectively communicate with your staff their eligibility to participate in the plan. That communication should be in writing, with a formal declination letter maintained if an employee elects not to be in the plan to substantiate that the communication took place. In cases where a formal declination letter is not utilized, some items that you can use to support your communication of the plan to your employees is the signed acknowledgement of the employee handbook (so long as information about the plan is included) or email correspondence to the employee when they become eligible. Guess what happens if you fail to timely invite an eligible employee into the plan … you may have to contribute past contributions and related investment returns into the plan on their behalf.
Improper Loans and Hardship Withdrawals:
The plan document should outline what your loan and withdrawals policies are (are they allowable, for how much, are hardship withdrawals allowed, etc.). Remember, when it comes to your plan, the plan document is the bible. If you don’t follow it, you could run into trouble. It is important that your HR staff is aware of the loan and withdrawal provisions so that when they are advising staff, they are providing the right advice.
Failure to Perform Discrimination Testing:
Discrimination testing is something that is typically done by your Third-Party Administrator (“TPA”) to determine that the plan is fair and that the upper level management is unduly benefitted by the plan. In order for the TPA to do their job, they need information from you, and that information needs to be accurate. Make sure you have good open dialogue with your TPA and your providing timely information, so that you can strategize to maximize your benefit, and if excess contributions are made, they can be timely distributed to avoid penalties.
Failure to File/Accurately File Form 5500:
The penalties for not filing or filing your form 5500 late are fairly steep. In addition, errors on your 5500 could open you up for an audit, as 5500 errors are one of the top reason plans get selected for audit. It is important that you understand who is responsible for filing your 5500 (not all TPA’s prepare these forms) and it is also important that the return is reviewed for accuracy by a knowledgeable party.
Inappropriate Fidelity Bond Levels:
All pension plans are required to have in place a fidelity bond. You should have coverage equal to the lesser of 10% of your plan assets or $500,000. If you don’t have the appropriate fidelity bonding, this will be disclosed in your 5500, and could increase your likelihood of a plan audit. We quite often see that crime coverage under your general liability insurance policy is interpreted as the fidelity bond coverage. The fidelity bond is separate coverage from your general liability insurance, as this insurance is specific to the plan and insures the plan assets against fraud and dishonesty from those individuals that handle plan assets. When looking to obtain the fidelity bond, you should ensure that the insurance company is named on the Department of Treasury’s Listing of Approved Sureties.
A pension plan is an important benefit that you can offer to your staff, but it is vital that you understand and follow your fiduciary responsibilities to avoid things blowing up on you.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.