Tips for administering your company’s 401(k) plan
Tips for administering your company’s 401(k) plan
Offering a 401(k) plan can help your company recruit and retain quality employees. But this type of plan requires you to adhere to stringent rules and maintenance requirements.
Regular review
Effective administration of a retirement plan involves a team, including the employer and plan sponsor, and possibly a CPA, third-party administrator, investment advisor, or specially designated group of trustees or board members. Check in regularly with your employee benefits advisor to ensure everyone is performing his or her role adequately.
Also ensure that you’re fulfilling your responsibility to the plan. For example, have you funded your employee and employer contributions on time? Have you properly classified seasonal employees and independent contractors? Are employee census data and forms up to date?
Don’t discriminate
After the end of a 401(k) plan year, you’re required to perform certain tests. If your business makes an employer contribution, you’ll need to ensure your plan covers the correct employees and has funded the correct amounts.
One potential test is the actual deferral percentage (ADP) / actual contribution percentage (ACP) test. It ensures that contributions don’t discriminate in favor of highly compensated employees and may require the return of “excess contributions” by the highly paid group. To prepare for this test, keep payroll records up to date and accurate, including items such as compensation and deferral amounts.
Changes, changes
Every plan has an enrollment date designating when employees can enter the plan (often quarterly or monthly). New employees also may need to accrue a period of service before becoming eligible. Regularly review your enrollment materials to ensure they adequately explain these dates to employees.
You may want to consider how often a participant can make election changes. For example, suppose an employee wants to change the amount he or she defers into your 401(k) plan. Your plan document needs to state when the participant can make this change.
If you wish to make any changes to your company’s plan, you’ll generally need to do so before the start of the next plan year. This includes opting to become a safe harbor plan, which guarantees the plan will pass certain discrimination tests as long as the employer makes a certain level of contributions.
Another plan change that can be made only before the start of the next plan year deals with accrued benefits. You can’t reduce already-earned accrued benefits, such as entitlement to a contribution. Like accrued benefits, restrictions to vesting schedules must be put in place before the start of the plan year. Similarly, expanding 401(k) plan features is usually better done before the beginning of the plan year.
Shift the burden
Overseeing a 401(k) plan and ensuring it meets regulatory requirements can be complex and time consuming. For this reason, many companies contract with a third-party administrator. Although you’ll remain ultimately responsible for the plan, a third-party administrator can make managing it easier.
