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Are You Kidding? The Fall Will Probably Kill You!

Adam C. Pozek 03/25/11

My good friend and benefits attorney Ilene Ferenczy sends out an e-newsletter from time-to-time.  The Ferenczy Flash always includes timely, practical information for plan sponsors and service providers.  The edition she sent earlier this week highlights a very important point that often gets lost in the 401(k) shuffle - while all of the fiduciary rules are important, it is failing to comply with the Tax Code that is more likely to land most plan sponsors in hot water.

The text of the March 23rd Ferenczy Flash is posted below with permission from Ilene.

Are You Kidding?  The Fall Will Probably Kill You!

In a recent Ferenczy Flash, we outlined our thoughts about the flood of advice being published by practitioners nationwide in relation to ERISA’s fiduciary rules.  Certainly, fulfilling your fiduciary responsibilities is really important and failure to do so can subject you to lawsuits and penalties.
However, concentrating so hard on the fiduciary issues can in some respects be like the Sundance Kid worrying that he would drown after jumping off a cliff into a river because he couldn’t swim.  As Butch Cassidy reminded him, the jump into the river itself would probably be fatal.  Similarly, while worrying about fiduciary issues has value, placing all of your concentration there may be missing the point.  In our experience, it is much more common for sponsors of small-to-medium-size retirement plans to be subject to an IRS examination than it is for them to undergo investigation by the Department of Labor.  And, the chances that there are problems with the plan from a tax perspective are much greater than that there are significant fiduciary liabilities – particularly for plan sponsors that are diligent about making their 401(k) deferral deposits on a timely basis.
In truth, the IRS enforces the Code rules very strictly and a failure to follow those rules can put the plan sponsor and the participants at risk for significant taxes and penalties.  What is worse, it is easy for these very technical rules to be broken without the plan sponsor ever knowing it.
There are common plan problems that we see and need to address daily for clients who think they’re doing everything by the book.  We thought it would be helpful to outline a few of these problems and to give you our tips on how to avoid them.
Big Problem No. 1:  Plan Documentation
The IRS is absolutely obsessed with proper plan documentation.  Commonly, the documents have all been prepared, but no one has signed and dated the copies of that documentation.  This is particularly problematic for clients who have changed service providers over the years.

What You Need to Do:

  • Contact whoever is responsible for your plan documentation and get a copy of every plan document, amendment, board resolution adopting documentation, employee notice, and summary plan description that they have.
  • Make sure you have a signed and dated copy of each document.
  • Put it all in a plan binder and keep it up to date.
  • Make sure your service providers have up-to-date copies of your documentation so that they are administering your plan properly.

Big Problem No. 2:  Who’s on First
You would be amazed at how much needs to be done to keep a plan in compliance!  It is very possible that you, as the plan sponsor, have duties that you don’t even know exist.  The IRS will seek to make sure that everything required to be done is actually accomplished.

What You Need to Do:

  • Have someone assess the tasks that need to be done to keep your plan in compliance and determine who is responsible for each task.  (We have a worksheet you can use for 401(k) plans. Just drop us a line and we’ll give you a copy.)
  • If you know everything that must be done and who’s doing what, you can determine whether there are unmet needs, or whether you are paying twice for the same service.
  • Plug the holes, and get rid of the duplications.

Big Problem No. 3:  Consider a Plan Health Check-Up

Only professionals can really review your plan to make sure that you are in compliance with the law.  If you have a large enough plan, your independent auditors will be reviewing some areas of compliance in their plan examination.  But your auditors don’t claim to be plan compliance experts, and they focus their attention on the financial operations of the plan.  So you might want to invest in a compliance review – that is, an examination by a professional that is not unlike an IRS audit, to see what the IRS would turn up if it examined your plan.  The IRS has correction programs that permit you to fix errors before an audit is a glimmer in the IRS’s eye – and by coming forward voluntarily to the IRS, you pay much lower fees or penalties to the IRS (often only in the hundreds of dollars) than you would pay if you got caught being noncompliant by an IRS examiner. You also accomplish this with considerably less wear and tear on you.  It’s somewhat like catching a disease in the early and curable stages.

What You Need to Do:

Consider hiring someone independent to review your plan for compliance with IRS rules.  If problems are found, work with a professional advisor (perhaps your favorite ERISA law firm!) to resolve the problems before they become deadly.

Topics: 401(k) Plan, ERISA, Fiduciary Responsibility, Department of Labor, IRS, Nondiscrimination, Retirement Plan, DWC


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.