As an employee benefit plan sponsor, you have a fiduciary responsibility to ensure that your qualified plan complies with all current employee benefits laws and regulations, and operates within the plan’s current provisions. To help ensure your defined contribution plan meets compliance standards, the Internal Revenue Service (IRS) encourages plan providers to consider this seven-question checklist:

  1. Has your plan been updated to reflect current legislation?
    Each year, the IRS releases a publication containing a cumulative list of plan qualification requirements, which includes recent legislative or regulatory changes. If your plan has not been revised within the last few years, chances are your plan is not in compliance.
  2. Are your plan’s operations based on the terms of your plan document?
    Conduct an independent review of your plan document provisions compared with its operation, especially if you’ve recently amended your plan. If inconsistencies are found, use a reasonable correction method that places affected plan participants in the position they would be in if there were no operational plan defects. Many plan operations issues may be self-corrected when caught early without involvement from the IRS. Remember, the plan sponsor generally is responsible for ensuring the plan operates according to its terms even when employing third-party administrators or ERISA attorneys.
  3. Is your plan’s compensation definition for all deferrals and allocations used correctly?
    Many plans have more than one definition of compensation, depending on the purpose. Review your definitions to be sure that you’re applying the correct definition found in your plan document. And remember, for 2016, the IRS has capped the total compensation permitted for contribution purposes at $265,000.
  4. Have you identified all eligible employees and given them the opportunity to make an elective deferral?
    Depending on your plan document’s terms, not all employees will be immediately eligible to participate. Some plans defer eligibility based on age, service and hours worked. Provide your plan record keeper with a regularly updated W-2 employee roster to minimize the chances you’ve overlooked anyone.
  5. Have you deposited employee elective deferrals on a timely basis?
    The Department of Labor (DOL) requires plan sponsors to deposit deferrals as soon as they can segregate them from employer assets, and no later than the 15th business day of the following month. Operationally, if you can make the deposits within one to three business days of the payroll date, you must do so. For plans with fewer than 100 participants, the DOL mandates a seven-business-day safe harbor rule. Failure to make timely deposits may be deemed a prohibited transaction, resulting in possible plan disqualification by the IRS.
  6. Do participant loans satisfy your plan document’s requirements?
    One problem the IRS sometimes encounters is that plans have made loans to participants, even though the plan document doesn’t provide for such loans. Loans cannot be more than $50,000, or the greater of $10,000, or half of the participant’s vested account balance. Amounts exceeding those limits are taxable to the participant . Failure to comply with the DOL regulations may result in a prohibited transaction.
  7. Did you make hardship distributions properly?
    A retirement plan may allow participants to receive hardship distributions, but they must meet the following eligibility requirements:

    • Immediate and heavy financial need. This includes medical expenses, costs related to the purchase of a principal residence or repairing damage to that home, family funeral expenses, postsecondary education tuition, room and board expenses for the next 12 months, and payments necessary to prevent eviction because of a mortgage foreclosure.
    • Limited to the amount necessary to satisfy that financial need. However, the amount may include amounts necessary to pay any taxes or penalties resulting from the distribution.

If you made hardship distributions without a plan provision, you must amend your plan document retroactively.

Answering “no” to any of these questions may result in serious consequences for the plan. If you believe your plan requires corrective action, please contact Doeren Mayhew’s employee benefit plan specialists to review your plan’s correction options.