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Ensure 401(k) Plans Comply With Legal Requirements Construction Business Owners Must Be Diligent Amid Increased Plan Scrutiny

One of retirement plan sponsors’ most important duties is to ensure the plan is in compliance with legal requirements. This is no easy task, especially for construction firms with high employee turnover.

The Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC) have specific requirements that plan sponsors must follow, and the current regulatory environment has led to increased scrutiny of plan practices.

Department of Labor audits are on the rise for contractors. A company can help ensure it is complying with ERISA and IRC requirements by reviewing its plan annually and following administrative best practices. The following administrative best practices identify some of the most important requirements and other considerations construction firms should consider to help minimize fiduciary risk. While this is not a substitute for a thorough plan review, it can help business owners feel more confident they are doing all they can to effectively meet plan responsibilities.

Ensure the plan document is up to date and aligns with the company’s goals and objectives.

This is important because there are statutory deadlines for adopting changes to keep your plan within the law. Business owners may be able to use a prototype or a volume submitter document to provide assurance that the plan complies with the IRC and ERISA. Consider using an independent third party administrator (TPA) in lieu of a record keeper.

RUN THE PLAN OPERATIONS BASED ON THE TERMS OF THE PLAN DOCUMENT

It sounds obvious, but failure to follow plan terms is a top mistake, according to DOL auditors. Business owners are ultimately responsible for keeping the plan compliant. They should communicate any plan changes to all service providers, plan fiduciaries and staff on a regular basis to ensure accurate administration.

ADHERE TO TIMELY AND ACCURATE RECORDKEEPING AND PROCESSING OF CONTRIBUTIONS

Late or erratic deposit of employee deferrals and loan repayments is another top compliance mistake among contractors. Employee deferrals and loan repayments are required to be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets. A good rule of thumb is to remit employee contributions three to five days from being withheld from an employee’s paycheck. Make the deposits sooner, if it’s possible. Be sure to be consistent among all payrolls and pay periods.

PROVIDE ONGOING PARTICIPANT EDUCATION

To comply with Section 404(c), plan sponsors must provide participants with enough information to make educated investment decisions. Ask the plan provider what plan communications (such as account statements, prospectuses, descriptions of fees and expenses) and participant education materials are included in plan fees.

ESTABLISH AND MAINTAIN A WRITTEN PLAN INVESTMENT POLICY

Although ERISA does not require such a document, this will help plan sponsors demonstrate that they follow a prudent process for choosing and evaluating plan investment options, if audited. Make sure to follow the investment policy statement and carefully monitor and benchmark plan investments at least annually. In addition, document when and why investment options are added to or removed from the fund menu.

SATISFY NONDISCRIMINATION TESTS

If a plan sponsor fails nondiscrimination testing and doesn’t take corrective action on a timely basis, it could result in the plan being disqualified. To avoid being disqualified, consider safe harbor provisions or automatic enrollment to help with testing. In addition, work with a TPA and other key parties to ensure all employees are classified on the year-end census correctly.

MONITOR PROVIDERS ON A REGULAR BASIS

Fiduciaries have a responsibility to ensure the services provided to their plan are necessary and the cost of services is reasonable. Business owners should ask their service providers for copies of their written service agreements. Also, issue a request for information or request for proposal at least every three to five years to ensure that you are receiving the most value. It’s a good idea to work with a plan advisor who is experienced in this process and is completely independent.

This list is not all-inclusive. It’s important for construction business owners to develop best practices that are tailored to their needs and the requirements of their specific retirement plan. The IRS’s 401(k) Plan Checklist and IRS 401(k) Fix-It Guide can help business owners establish their own guidelines.

If more information and guidance is needed on whether a plan is in good order, call a retirement plan advisor. An advisor not only knows the compliance territory, but also has the experience and expertise to help manage a quality retirement plan.

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