03/23/2016
8 Ways Companies Sink their 401(k) Plans

8 Ways Companies Sink their 401(k) Plans

There’s no shortage of administrative responsibilities in offering a 401(k) plan, and far too many companies make avoidable mistakes that result in fines or plan disqualification. Plan disqualification can have disastrous consequences for participants, including the dissolution of the plan and re-characterization of all participant account balances as taxable income. Today we’ll break down eight common 401(k) blunders.

Late Deposits

Employers must deposit employee contributions by the 15th business day of the month after contributions were received. Department of Labor rules also stipulate that contributions must be made as soon as contributions can be segregated—which means that employers waiting until the deadline may in violation of the rules.

Straying from Terms

A surprising number of employers fail to adhere to the terms established in the 401(k) plan document. Common errors include not making timely matching contributions, missing eligibility periods, allowing employees to enroll too soon, and not enrolling employees who haven’t opted out.

Not Updating Safe Harbor Notice

Safe harbor notices detailing matching or non-elective contributions, vesting provisions, and withdrawal provisions must be made every year in a timely manner. “Timely” in this instance means between 90 and 30 days before a plan year begins.

Lack of a Fidelity Bond

Fidelity bonds must equal to 10% of a 401(k) plan’s assets for protection against trustee malfeasance.

Not Adhering to Annual Compensation Limits for Benefit Calculations

The annual compensation limit for a 401(k) plan in 2016 is $265,000. In other words, a plan’s employer-match formula may only be applied up to $265,000 in compensation regardless of how much an employee makes.

Deficient Loan Servicing

If a 401(k) plan provides for loans, participants are required to repay the loans according to specific repayment terms. Normally, the terms call for repayment in five years with payments made every quarter.

Late Form 5500 Filing

Form 5500 provides information on the specific components of a 401(k) plan, and employers must file it annually by the last day of the seventh month of the year after the plan year ends—usually around July 31st.

Failure to Make Top-Heavy Contributions

“Top-heavy” rules dictate that “key” employees may not hold 60% of the total assets in a 401(k). Employers must make corrective contributions of up to 3% of compensation for non-key employees any year that a plan is top-heavy.  A “key” employee is defined as:

• An employee that owns more than 1% of the business and makes more than $150,000
• A owner holding 5% or more of the business
• A company officer that makes over $170,00

Financial Planning with OptiFour

OptiFour Integrated Wealth Management has provided financial planning and implementation services in and around Washington, D.C. for the past 25 years. Our financial planners offer integrated wealth management designed around each client’s individual goals. For more information on our services, please visit our homepage.

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