Any business should want to attract the best of the best when it comes to hiring their employees. But once those people are hired, it should be the goal to keep those new hires on board for a long time. One way this can be executed is through desirable benefits, such as retirement benefits and 401k planning. There are other benefits to offering a retirement plan to a team beyond improving employee retention as well.
Contributing to a retirement benefits plan or matching an employee’s 401k contributions could lower a company’s tax bill. Furthermore, a company might also qualify for a tax credit for said plan, which also helps companies reduce their overall tax bill.
But when a company sets up retirement plan options, they have to follow retirement plan compliance, which is overseen by the Department of Labor and the Internal Revenue Service (IRS). And with audits increasing in recent years, companies need to make sure they are properly maintaining, understanding, and following plan documents to minimize risk should a retirement plan be audited.
Here’s a closer look at ensuring Retirement plan compliance.
Set Up a Qualified Retirement Plan
First, some companies might ask, what is a qualified retirement plan? And they’re right to ask it. A qualified plan is one that meets the rules and requirements of the Internal Revenue Code (IRC). These plans are eligible for certain tax advantages, such as tax deferment. According to the Department of Labor, there are an excess of 650,000 defined contribution retirement plans in the United States, of which four out of five are 401k plans.
Here are some steps that companies can take to better understand retirement compliance:
- Understand Qualified Retirement Plan Types: Many kinds of plans meet the requirements of the IRC. The right plan for a certain company is dependent upon the type of company that is being run and its size. Some qualified plans include traditional 401k plans, Safe Harbor 401k plans, and 403b plans.
- Create a Written Retirement Plan: Companies should also adopt or create a written retirement plan that outlines its daily operations and goals. When a plan provider is chosen, a company should see if they will take care of creating the written plan, as this is something that can be requested. This also helps to limit the potential for any legal matters and liabilities.
- Trust Fund for Assets in a Retirement Plan: When a company’s employees contribute to a retirement plan, they put their trust in that company and expect their money will be put toward a bonafide retirement plan. To ensure any assets in the plan are used for their participants’ benefits, the plan needs a trust and trustee to handle the responsibilities of collecting and investing contributions.
- Record-Keeping Systems Work: A company must keep accurate and reliable records when setting up and maintaining retirement compliance. The record keeping system should track expenses related to the plan, the value of contributions, benefit distributions, and investments. Maintaining good records will help to streamline the process of filing tax returns every year.
How to Ensure Retirement Plan Compliance
A company has a few options for ensuring their retirement plan stays in compliance. First, it’s important to make sure you stay away from certain missteps that could land you in legal issues or audits with the DOL or IRS. One mistake is excluding eligible employees, meaning that companies should clearly define which employees are eligible for participation in the retirement plan. Next, a company should avoid not using the correct compensation to determine deferrals. A company’s plan should clearly outline what sources of compensation, such as salary, can be used to determine the amount of deferrals.
There are also several tests a company needs to put its retirement plan through to ensure it is in compliance, including Actual Deferral Percentage (ADP) Test, Actual Contribution Percentage ACP) Test, Top-Heavy Test, and Actual Deferral Percentage Test. Essentially, high-earning employees can’t contribute or receive deferrals of more than twice the contribution or deferral percentage of non-high earning employees.
A company has a few options for ensuring that a plan remains in compliance and doesn’t show discrimination against employees. If a company’s retirement plan doesn’t pass a test, a company can distribute any excess contributions made to high earners back to them, so that their total contributions stay in line with the IRC’s requirements. If a company doesn’t pass the ADP test, they can increase the amount of the deferral made to non-high earning employees to bring them to the same level and inline with the deferral received by high-earning employees.
Another option for companies is to establish a Safe Harbor 401k plan, as noted above. This kind of plan doesn’t need to pass non-discrimination tests. Under this kind of plan, a company has to make certain contributions to employees’ 401k plans. The company can choose to match contributions or offer a non-elective contribution.
While these tips are helpful to companies when making sure they operate retirement compliance, there is still the possibility of having to deal with discrepancies in contributions and liabilities with employees who feel they have been left out of retirement plan options. Making sure you are regularly reviewing your plans can help to avoid major legal risks and compliance issues.
About The Hilb Group
Deciding what coverage you need and what limits and deductibles make the most sense can be tricky. Founded in 2009, the Hilb Group has been helping clients to make sense of their options and make the smartest choices for their circumstances. Whether you need Warehouse Insurance or any other type of business or personal coverage, we encourage you to contact our friendly, experienced, and capable team today. Call us at (800) 776-3078 for a consultation.