Many small business owners give little thought to their company’s 401(k) plans. Often, employers use third party administrators to administer the plan, and once it is in place, they forget about it. This can be a costly mistake.Here are five of the most common mistakes small business owners should consider:
1. Failure to deposit contributions on time.
This mistake has the potential to be a double whammy, because the employer will hear from both the IRS and the Department of Labor. Employers must deposit amounts withheld from an employee “as soon as it’s administratively possible to segregate the funds.” For most, this is a matter of days. Correcting this failure will include paying interest on the late contribution.
2. Failure to properly include employees as participants.
The plan spells out when employees become eligible to participate, but entry dates can be confusing and employers need to review them for new employees to ensure they are able to participate in a timely manner. The employer will be required to make up contributions the employee was unable to make because they weren’t properly included.
3. Failure to properly follow an employee’s deferral election form.
With a 401(k) plan, employers must allow employees to make an election to defer a portion of their income into the plan. If this election is not timely made or, if it is not correctly followed, the employer is responsible for making up missed deferrals.
4. Failure to obtain spousal consent of plan distributions.
Some plans require that the distribution be in the form of a Qualified Joint and Survivor Annuity (QJSA) unless the participant’s spouse consents to an alternative form of distribution. This requirement can be overlooked if the participant is single but subsequently marries. Failure to obtain necessary consent can result in the employer being required to pay benefits twice.
5. Loan provision mistakes.
Many 401(k) plans allow participants to borrow from the amounts they deferred into the plan. Rules regarding plan loans are precise as to how much can be borrowed and the length of time a loan can be outstanding. Employers often run into problems when participants request multiple loans. Correction of this mistake may require the participant to take a premature distribution thereby incurring a penalty.
Most plan sponsors believe that their service providers are responsible for the management of their 401(k) plan. You and you alone are responsible and liable, as a fiduciary. In most contracts, the service provider takes direction from the plan sponsor.
Please comment or call to discuss how this affects you and your company.