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Why Compliance Services Are Important for a Plan Sponsor

DWC 10/9/17

Retirement plan compliance is a big deal to the IRS.  After all, the tax deductions that both plan sponsors and participants receive each year for contributions to retirement plans surpass deductions taken for charitable donations and health insurance premiums.  With so much at stake, the IRS wants to be sure everyone is playing by the rules.

The IRS may have its own top 10 list of common mistakes that it sees, but over the years, we have developed a list of our own.

Incorrect Safe Harbor Contributions

The Issue

We often hear a comment that goes something like this: ”Safe harbor plans get a free pass on everything, so all that compliance testing doesn’t really matter.  Hiring someone who is good at compliance is just a waste of money.”

There are several problems with that statement.  First and foremost is that a safe harbor 401(k) plan is only exempt from some compliance tests.  However, there are a number of additional requirements that must be met to qualify for those exemptions, and some of those requirements are more detailed than the tests they replace.

Although not complicated, one area where we frequently see missteps is that of the required company contribution.

How DWC Can Help

As part of Annual ERISA Compliance Review, we look at the safe harbor provisions contained in the plan document and compare them to the actual operation of the plan.  This includes calculating the required contributions and comparing our results to what was funded throughout the year to identify any discrepancies so that they can be adjusted immediately.

Controlled Group Determinations

The Issue

When there is overlapping ownership between companies, it can trigger some additional rules on how to conduct year-end compliance testing for a retirement plan.  Those rules can come into play even if the companies operated completely separately and may apply to employees that are not even meant to be covered by the retirement plan.

The challenge is that many service providers do not ask for the information necessary to make these determinations.  It might be that they do not understand the rules enough to ask or that they underestimate the importance of reviewing this critical area each year.

How DWC Can Help

DWC’s team of experts is well acquainted with these rules, and we appreciate their importance in maintaining plan compliance.  Because of that, we ask for the underlying data each year and review it to determine whether there are any unexpected bumps in the road.  If several companies must be combined for testing, we proactively suggest plan design alternatives that address the situation in the most favorable manner.

Year-End Payroll Does Not Match Compliance Reports

The Issue

Many of the retirement plan rules are a bit counterintuitive.  As a result, it is not unusual for a well intentioned plan sponsor to provide only selected data to their service provider at year end rather than submitting a full and complete census for every single employee who worked during the year. 

Unfortunately, without complete and accurate data on all employees, it is impossible to provide a complete and accurate compliance report.  Since many service providers take the “garbage in, garbage out” approach, they will simply run the data through the sausage grinder without asking any questions, leaving the plan sponsor to deal with any fallout.

How DWC Can Help

We know that the analyses we perform are only as good as the data we are given.  As a result, we go the extra mile to help our clients ensure the accuracy of the information they provide us.  This may include comparing demographic or compensation data to what we received in previous years.  It may mean asking additional questions as to why there was a sudden increase or decrease in the number of employees. 

Although we might not realize that the date of birth for a new employee is off by a year, we are on the lookout for birth dates that appear unusual for the company.  Plan sponsors can rest assured knowing they are working with experts who take the time to help confirm the underlying data is solid.

The Annual ERISA Compliance Review we prepare for every client every year documents our findings not only in the above three areas but for the plan’s overall operational compliance.  And, it’s not a simple “yes/no” or “pass/fail” type of report.  It includes all of the underlying data, the detailed test results, confirmation of compliance, and where necessary, the details of any corrections. 

The result is a self-contained package that, if followed, is a compliance road map a plan sponsor can hand to an IRS auditor with confidence in the outcome. 

For more information on fiduciary duties and due diligence, visit our Knowledge Center.

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Topics: DWC, Plan Compliance, Fiduciary Duties and Due Diligence


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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.