Plan management is a primary component of Department of Labor and IRS compliance for an Employee Benefit Plan audit. When preparing for an audit, ensure that the following tasks are complete to help the audit process go as smoothly as possible. Below are seven issues where an auditor will look for compliance:
- Make and document all employer matching contributions to appropriate employees under the terms of the plan.
Not as simple as it sounds, employers can unknowingly violate the terms of the plan with matching contributions.
- Check your plan for rules regarding deferred income.
- Properly identify plan entry dates and hours of service (if applicable).
- Be sure to calculate amounts on an annual instead of pay-period basis.
- Be aware of any changes made in the plan since the last audit to be sure to comply with the changes for all participating employees.
- Satisfy the 401(k) nondiscrimination tests (ADP & ACP).
ADP is Actual Deferral Percentage and ACP is Actual Contribution Percentage. Each year there must be a balance of the two (ADP and ACP). This has to do with the amount contributed by non-highly compensated employees (NHCEs) in relation to the amount contributed by highly compensated employees (HCEs). As the amount contributed by NHCEs grows, the amount that HCEs can defer increases. See the IRS document or talk with your auditor if you have questions in this area.
- Identify all eligible employees regarding the opportunity to make an elective deferral election.
It’s important for your plan to have a definition of eligible employees. Generally, this is all employees who receive a W-2. You can reduce the risk of excluding employees from the election opportunity by keeping records of dates of birth, dates of hire, dates of termination, number of hours worked, compensation for the plan year, 401(k) election information and any other information necessary to properly administer the plan.
- Comply with elective deferral limitations.
Be sure that the amount of elective deferrals does not exceed the 2015 tax year limit of $18,000 for traditional or safe harbor 401(k) plans. An exception to the limit is catch-up contributions for participants who are age 50 or over at the end of the calendar year. For 2015, traditional or safe harbor 401(k)’s can catch up with an additional $6,000. (These amounts represent an increase from the 2014 tax year.)
- Make timely deposits for employee elective deferrals.
Not making timely deposits of your employee elective deferrals puts your company in the ‘prohibited transaction’ category, which results in an excise tax. Be sure that you have a policy in place with your payroll provider to determine the earliest date possible for separating the deferral deposits from general assets. Set up a procedure to make deposits and document accordingly.
Conform participant loans to the requirements of the plan document and IRC 72(p).
- Your plan document needs to include a list of rules for participants to follow when taking a loan from a 401(k) account. Briefly, IRS code §72(p) says that:
- The loan must be in writing and legally enforceable.
- The loan amount cannot be more than $50,000 or 50% of the vested balance, whichever is less.
- The loan must be on a repayment schedule at least quarterly, and be repaid within five years.
- There are exceptions for leaves of absence, but the loan must still be repaid within five years.
- Define and properly execute hardship distributions.
Employers can make the determination about hardship distributions, and definitions of hardship need to be included in the plan document. Examples of hardship are unexpected large medical bills, significant education tuitions, saving a home from foreclosure or funeral expenses for a close family member. You need to review the hardship distributions at the end of each year to make sure that the distribution is in alignment with provisions in your plan document.
Fewer complications help you keep audit fees reasonable. For more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf, or contact Dalton Cox, CPA at Salmon Sims Thomas Accountants and Consultants.