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Retirement Plan Management Mistakes and how to Avoid Them

May 26, 2022

Planning for your employees' retirement can be scary. Mistakes are easy to make, and consequences can be costly.

We've prepared this reference guide with common scenarios and solutions to alleviate any stress you may come across in your planning process.

I forgot to file my Form 5500, and the deadline has already passed

If you forgot to file your Form 5500, you will receive a penalty letter from the Internal Revenue Service (IRS). We understand that these letters can be scary, so we are here to help.

Once you receive the letter, you must respond with the proper documents. If you plan to respond by yourself it must include the proper Form 5500, and a detailed explanation for why the employer failed to file the form 5500 at the proper time. The reason this response is so pivotal is that under certain circumstances, the IRS may waive the late fees through the Delinquent Filer Voluntary Correction Program (DFVC). However, if the explanation either doesn't apply or is not told correctly, these late fees will not be waived. 

At LRS, we offer a service to respond to these IRS inquiries on your behalf. While you do have the option to respond yourself, we recommend having our experts reply to receive the best results.

My employee became eligible for the retirement plan, but I forgot to give deferral opportunities

Here are the steps that Leading Retirement Solutions will need to take:

  1. Review the plan document sections on eligibility and participation. Check with LRS to verify when employees should have entered the plan.
  2. Make a qualified non-elective contribution for the employee that compensates for the missed deferral opportunity.
  3. Regularly monitor census information and apply participation requirements, going forward.

The IRS and Department of Labor love to see processes in place to help ensure that this type of mistake doesn't happen again.

My plan failed the 401(k) ADP and ACP nondiscrimination tests

Nondiscrimination testing is a way for the IRS to analyze whether employee deferral amounts and employer contributions are distributed properly. If your plan failed nondiscrimination tests, an independent review by industry professionals will help to determine if highly and non-highly compensated employees are properly classified.

To resolve this issue, make contributions to the non-highly compensated employees. These contributions must be qualified and nonelective meaning independent of the contributions each employee deposits.

Going forward, consider a safe harbor or automatic enrollment plan design. Communicate with plan administrators to ensure proper employee classification and compliance with the plan terms.

I didn't use the plan definition of compensation correctly

If you did not use the plan definition of compensation correctly, here is what you can do. Review the plan document definition of compensation used for determining elective deferrals, employer nonelective and matching contributions, maximum annual additions, and top-heavy minimum contributions. Review the plan election forms to determine if they're consistent with requirements detailed in the retirement plan legal documents.

To fix this, your plan provider may utilize corrective contribution or distribution. A corrective contribution will fix the discrepancy by adding funds into an employee's account. A corrective distribution on the other hand takes a portion of the money that is in the retirement account and gives it back to the account holder, losing its tax benefit status. 

In the future, perform annual reviews of compensation definitions and ensure that the person in charge of determining compensation is properly trained to understand the plan document.

You may have realized by now that if you find yourself in a stressful situation, the best thing to do is simply take a deep breath, pick up the phone and call Leading Retirement Solutions. We are here to assist whenever you may need it.


For more tips and information about retirement plans, contact us

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