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5 401(k) Details That Can Kick You Out of Compliance

Compliance-Check-ListAs an auditor, it’s my job to look at every aspect of a 401(k) plan to ensure ERISA compliance that in turn protects employee retirement funds. Here are five details to watch to make sure that your plan stays in compliance:

  1. Pre-tax contribution limits – A percentage of income contributed to a 401(k) plan can easily exceed the annual limit for highly-compensated employees. Be mindful that $17,500 is the pre-tax limit for 2013. However, if an employee is over age 50 by the end of the plan year, the limit is an additional $5,500, or $23,000.
  2. Pre-tax contribution deductions – Even though income is deferred into a 401(k) plan for taxable wages, employers must still take out Social Security, Medicare, and federal unemployment taxes. The employee pays federal (and state, if applicable) income tax on the amount after the money is withdrawn from the account. (Unless the account is a Roth IRA.)
  3. Roth IRA & traditional IRA management – Roth IRAs require income tax payments on the amount, and traditional IRAs do not. If you offer both types of plans, make sure that your accounting is correct.
  4. Loans to participants – If your company is willing to loan an employee use of IRA funds, you must charge a reasonable rate of interest for the privilege. Typically, the interest charged is the Prime Rate, or Prime plus one or two percent.
  5. Discrimination in favor of highly compensated employees – If 60% of the total amount of funds in the plan is held by high earning employees, then the plan is considered discriminatory against lower wage employees. The plan must meet minimum contribution requirements or else use a safe harbor plan that does not have discriminatory evaluation.

If you have specific questions regarding the details of your plan, please contact me, Dalton Cox. Answering your question will likely benefit other readers as well.

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