For small business owners, investing in a retirement plan for employees can be a tough sell. Retirement plans can be expensive and are often difficult to administer, not to mention the fiduciary risk involved if the plan isn't managed properly. But offering a retirement plan can also be an incredible asset, as well. One of the most popular retirement plan options offered today, a 401(k) plan provides employees with the flexibility to make their own investment and contribution choices while simultaneously giving smaller employers an edge over their competitors when it comes to recruiting top talent.
While 401(k) plans are certainly an attractive option for both employers and employers, they can land businesses in some serious hot water if they aren't regularly reviewed to ensure they're in compliance. In fact, not updating plan documents regularly to reflect any recent changes in legislation is the biggest mistake employers make when it comes to managing their plans. So how can employers avoid falling into this trap?
The missing piece
All 401(k) plans should be established and supported by a written plan document that complies with the provisions of the Internal Revenue Code (IRC). This document acts as the foundation for the day-to-day operations of the plan, and employers are bound by the terms outlined in the plan document.
How to catch this mistake
Like all other policies and benefit plans, 401(k) plan documents should be reviewed and, if necessary, amended to ensure that they are in compliance with all applicable federal and state regulations. Each year, the IRS issues a "Cumulative List of Changes in Plan Qualification Requirements," which employers can review to verify that their 401(k) plans have all the required law changes.
How to fix this mistake
As soon as an employer becomes aware that a plan is out of compliance, they should immediately plan to take corrective action and adopt amendments for the tax law changes that were missed (the IRS provides model amendments employers can use, if needed). If the employer has missed the deadline to adopt an amendment, they may need to contact the IRS or use the IRS correction program.
Here's the solution:
The easiest way to avoid letting parts of your plan fall out of compliance is to regularly review your plan documents, and to stay in touch with the provider who sponsors or sold you the plan, or any outside professionals who helped you draft the original plan documents. If you receive any notifications of amendments from these trusted sources, make sure to execute them on a timely basis. If necessary, designate a point person within your organization to manage your plan.
If you've just made the decision to begin offering a 401(k) plan to the employees of your small business, you likely have a lot of questions on how to get started. At G&A Partners, we're experts in all types of employee benefits options, including 401(k) plans. From plan design to ongoing administration, our dedicated 401(k) specialists will help you through every step of the process of implementing your plan, including ensuring that it is always in compliance with the latest applicable tax laws. If you're interested in learning more about our 401(k) services, schedule an appointment with a local G&A Partners business advisor.