Common Pension Plan Problems

Are you or someone within your organization responsible for the administration of a 403(b) or 401(k) plan? Do you feel lost in trying to comply with all of the required Department of Labor (DOL) and Internal Revenue Service (IRS) regulations? You are not alone. The area of 403(b) and 401(k) administration is complex. Although your organization may outsource some of the plan’s administration to a third party service provider, it is still ultimately the responsibility of the plan’s trustees and administrator to ensure compliance with these regulations.

The DOL requires that large pension benefit plans under-go an independent audit similar to any other financial statement audit you may have experienced in your organization. However, unlike a traditional financial statement audit, a pension benefit plan audit also focuses on assessing whether or not the plan is complying with DOL and IRS regulations.

Wegner performs pension benefit plan audits for many different types of plans and organizations. Plans requiring an audit generally have 100 or more participants and are referred to as large plans. Plans not requiring an audit generally have fewer than 100 participants and are referred to as small plans. All plans must follow the same rules. We recommend that you review your plan document and particularly your plan adoption agreement annually. You should also review the internal controls over the plan that ensure compliance with the DOL and IRS regulations. In our experience with pension plans we have identified three common compliance deficiencies. We recommend that you review the following three areas:

1. Definition of Plan Compensation

Your plan document or plan adoption agreement provides a definition of compensation for the plan. This definition should be used when calculating employee deferrals, employer match, and/or employer non-elective contributions. Using the wrong definition of compensation could result in the participants receiving incorrect amounts on a pre-tax basis. There are many acceptable definitions of compensation. Make sure you know your plan’s definition and make sure that you are following it.

2. Eligibility

Your plan document or plan adoption agreement provides a definition of eligibility for the plan. There may be different definitions of eligibility for employee deferrals, employer match, etc. Using the wrong eligibility criteria could allow employees to enter into the plan too early or prevent employees from entering into the plan on time. Many plans define one year of service by defining the number of hours you must work in one year. For example one year of service may be defined as having worked 1,000 hours in a 12 month period. It is important that you review the definition of years of service when considering eligibility.

3. Timeliness of Remittances to the Plan

If your plan allows for employee deferrals and/or participant loans, you are required to remit the money that you withhold from the employees to the plan as soon as administratively possible. This generally means as soon as you can segregate the funds from the employer’s general funds. This should typically be able to be done within a couple days of the payroll date. The DOL has issued a safe harbor for small plans (less than 100 participants). Remittances for small plans will not be considered late if they are remitted within 7 business days of the payroll date. There is currently no safe harbor for large plans.