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Tips to Avoid Common Retirement Plan Errors

March 13, 2024

Being on the wrong side of ERISA and Internal Revenue Code requirements creates one headache after another. To prevent common errors, you need to make sure your plan document satisfies these requirements, but you also need to make sure you are following the terms of your plan document. Here are some common errors and helpful tips for avoiding them.

1. Plan Documents: A simple error with a big impact.

Make sure your plan has the required documentation. This seems simple and it can be, but it is also one of the most common errors. Your plan documents must comply with ERISA and Internal Revenue Code requirements. For example, you must sign and date the plan document, sign and date any amendments, adopt amendments in the way your plan requires, and disclose your Summary Plan Description (SPD) to participants and beneficiaries as required by law.

2. Eligibility: Wait, was Jim eligible to participate last year?

Errors about who is eligible to participate, and when they begin participation, are also common. Your plan document defines eligibility, so refer to it often and avoid late enrollment of eligible participants. Plan documents often also exclude certain employees, either because they are covered by another plan or because they simply are not eligible. For instance, seasonal and temporary employees are often excluded from retirement plans, and union employees sometimes have separate plans to reflect the terms of their collective bargaining agreement. You need to correctly and consistently apply these exclusions.

3. Timing is Everything: Making contributions.

Plan documents usually set forth the deadlines by which contributions must be made. These deadlines may vary depending on the type of contribution (for instance, employee elective deferrals must be deposited as soon as reasonably possible, whereas employer contributions may have a later deadline). Contributions deposited after the deadline are deemed to be late. Making late contributions, or otherwise failing to make consistently timely contributions, may require corrections that include government filings, self-correction and additional contributions for lost earnings. To avoid errors, determine with your payroll provider how early you can reasonably make contributions and set procedures to help ensure deposits are consistently made by that date.

4. Loans: Write down the rules and follow them.

401(k) plans may allow participants to take loans but aren’t required to offer loans. If they do, the loan procedures must be in writing. The plan administrator (or the loan administrator, if separate) should always follow the written procedures, especially with regard to repayment terms, the maximum number of loans, and the terms and process for taking loans. Failure to follow the loan procedures or other failures involving loan payments may often require correction.

5. Fiduciary Duties: Document, document, document.

The importance of documentation cannot be overstated. Fiduciaries for retirement plans are entrusted with certain responsibilities for plan participants and beneficiaries, and with great fiduciary duties come great potential liabilities! Fulfilling these responsibilities is only part of the obligation. How fiduciaries meet these responsibilities matters, as does documenting compliance with the fiduciary duties. Documentation provides a clear picture of how decisions are made and why—it provides rationale at the time of the decision and can help prevent later speculation by those not part of the process. It also helps avoid the risk that a fiduciary will comply with fiduciary duties in the moment but will be unable to prove it when a claim is made.

These are only some common errors we see in retirement plans. Often, preventing these errors is simple, and preventative measures are easier to take than corrective steps. If you have any questions about compliance, how to correct these errors and others, or other employee benefits matters, please contact your Varnum Employee Benefits team.

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