With all of those pages of checkboxes and legalese, it’s easy to think that close enough is good enough when it comes to following the plan document; however, neither the courts nor the IRS see it that way. Both have consistently held that the words on the plan document pages are all that matters when it comes to compliance. Any extraneous documentation about anyone’s intent is pretty much irrelevant. That’s not to say that plan provisions can never be changed. Retirement plans are generally required to be updated at least every six years, and they can be voluntarily changed at any time (subject to some timing limitations). However, once the plan document is in place, it must be followed to the letter until it is formally changed through a (mandatory or voluntary) amendment or a restatement.
It’s not enough just to have these documents, they must be timely executed (signed and dated) in order to be valid. We’ve lost count of how many times we have seen plans operated according to unsigned documents. There are some practitioners who won’t think twice about the “magic amendment” solution – coincidentally “finding” a signed document if a plan finds itself in an IRS 401(k) plan audit. That is a dangerous game to play, and we are aware of at least one situation in which an IRS agent threatened criminal fraud charges against both the plan sponsor and the document provider over one of these magic amendments.
Pretty much all company-sponsored retirement plans must file certain forms with the IRS and/or the Department of Labor. Certain 403(b) plans as well as owner-only plans with less than $250,000 in assets are exempt from some, but not all of those requirements. Here are the three most ubiquitous ones:
Form 5500: Reports annual activity about a plan, including the number of participants, financial activity, and the compliance status of certain key areas. Plans must generally file no later than seven months following the end of each plan year (July 31st for calendar year plans), but that deadline can be extended by an additional 2 ½ months by filing Form 5558 by the initial deadline.
With all the different deadlines (depending on the reason and type of contribution), it is no wonder this topic can be cause for confusion.
Employee DeferralsThe deadline to deposit employee deferrals and participant loan payments is generally two to seven business days following each pay date. There are certain very rare instances that allow more time (subject to an outside limit), but they are few and far between. If someone tells you have until the middle of the following month, get a second opinion.
- Company Contributions For tax-deductibility, companies must deposit matching and profit-sharing contributions no later than the due date (including extensions) of the company tax return. However, there are some other deadlines that might apply. For example, certain safe harbor matching contributions are subject to a quarterly deposit deadline.
There are also specific retirement plan contribution limits that must be adhered to:
*For a plan year that is less than 12 months (either due to initially establishing the plan after the first of the year or terminating a plan before the end of the year), these limits must be pro-rated based on the number of months in the short plan year. For example, a plan year that runs from January 1st through September 30th would multiply the applicable limit by 9/12.
To see a chart of historical contribution and testing limits data, click here.
Forfeitures are the amounts leftover when a former employee who is partially vested takes a distribution. Those dollars roll back into a holding account within the plan, and the plan document specifies how and when they can be used. Most plans allow forfeitures to be used for one or more of the following:
- Allocate as additional company contributions,
- Offset company contributions, and/or
- Pay eligible plan expenses.
The point of confusion is often on when forfeitures can be used. Often times, the total forfeitures for any given year will be a relatively small amount, leading some plan sponsors to decide to carry it forward for a few years until a decent amount accumulates. Unfortunately, that is generally not permitted (at least not longer than maybe a year or two). Depending on how the plan document is written, forfeitures must be used the year they occur, in the year after they occur or a combination of the two. They cannot be carried any longer than that.
There are a host of other deadlines that apply to 401(k) plans. Some of them are recurring, and others are more ad hoc. The best service providers will proactively work with you to help you meet satisfy these responsibilities on a time basis.