COMPLIANCE ALERT
INTERNAL REVENUE SERVICE (IRS) / DEPARTMENT OF LABOR (DOL) COMPLIANCE ALERT
LATE 401(k) CONTRIBUTIONS/LOAN REPAYMENTS & MISSING/LATE ENROLLMENTS OF PARTICIPANTS
Please be aware the IRS & DOL are taking an increasingly aggressive approach to monitoring and compliance of all Retirement Plans, in particular 401(k) Plans. The IRS & DOL expect you to SELF-CORRECT any compliance defects. Please note, self-correction means that you correct the defects prior to any announced audit by the IRS & DOL.
Depending on the defect, correction methods may require you to:
a. deposit additional contributions and interest to the Plan;
b. pay IRS penalties and excise taxes;
c. submit additional information to IRS/DOL;
d. incur additional administrative fees to correct the problem
The two most frequent defects and concerns for many Plans are the following:
1. Failure to transmit/deposit employee 401(k) contributions or loan repayments into the Plan within 7 business days of each pay period.
We urge you to have procedures in place to timely deposit all contributions to the Plan. Minor corrections can result in extra administrative fees of about $175.00 in addition to any late interest/investment gain adjustments and IRS penalties/taxes.
2. Failure to timely enroll participants in the Plan (or obtain a valid signed waiver of participation).
As Plan Sponsor, you are required to enroll each eligible participant on a timely basis. Essentially this means that you must provide each eligible participant with information on the Plan PRIOR to their entry date and implement their election, if applicable.
This type of defect can be VERY COSTLY to the company with potentially SIGNIFICANT extra contributions and interest required on behalf of the affected participant.
You must obtain a signed enrollment form prior to each employee’s entry date into the Plan. If an employee does not want to contribute to the Plan, they must still complete the form by electing to “contribute $0” or indicating that they “do not” want to contribute to the Plan. This form is proof you offered the Plan to your employee(s).
The IRS has provided guidance on correction methods Plan Sponsors must follow to correct defects relating to missing enrollment forms. The correction is severe. Below you will find an example of the amount of money the Company could potentially have to contribute on behalf of an employee that was enrolled into the Plan 12 months late:
*Example: The average employee 401(k) contribution to the Plan is 6% of gross wages. The company matching formula is 100% of 4%. The investment return was 10% for the year. John Smith’s gross wages for the year were $40,000. His entry date into the Plan was supposed to be 1/01/2021, however he was enrolled late and didn’t enter into the Plan until 1/1/2022.
Correction: To correct the “late” enrollment into the Plan by John Smith, the Plan Sponsor is required to make the following contribution on his behalf:
401(k) $ 600.00
Employer match $ 1,600.00
Investment gains $ 220.00
Total amount payable by Employer to Plan $ 2,420.00
As you can see, this is a significant cost to the Employer! Keep in mind that this is the correction for only one employee, if additional employees are involved the cost could escalate significantly.
If procedures are not already established for collecting enrollment forms on a timely basis, now is the time to ensure those procedures are in place for distributing and collecting the forms for all eligible employees. If you are unsure who is eligible for your Plan or when their entry dates are, please contact us.