Hidden Rules of the 401(k) and 403(b) – Part 1

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Emma Kong

The issues most plan administrators don’t know until they go through their first audit

Administering a retirement plan is often an area that accountants may not be very familiar with.  There are many rules and laws that apply to these plans, and if not followed can lead to some serious penalties for the employer and the administrator.  The rules and laws apply to all 401(k) and 403(b) retirement plans, not just the ones that are subject to an independent audit.

In order to assist plan administrators and employers avoid potential penalties, we wanted to discuss some common issues that we see.

Are you making deposits for employee contributions too late?

If your retirement plan’s contribution is deducted from the employee’s paycheck each pay period, you are required to deposit the contributions in a “timely manner”. The Department of Labor regulations states that the employer must deposit participant contributions as soon as it is reasonably possible to separate them from the company’s assets, but no later than the 15th business day of the month following the payday.

What is reasonably possible?  For small plans with fewer than 100 participants, the “safe harbor” time period is 7 business days. For bigger plans, the DOL has refused to provide a “safe-harbor” time period for this requirement. If the plan administer demonstrates that they can segregate the contributions within 3 business days, the DOL could consider a contribution made 5 business days after the payroll date to be a late contribution. In most instances, the assets can be separated the day the payroll taxes are paid, therefore, the remittance would need to occur the same day as payroll and any deposits beyond that would be considered late.

If the contributions were deposited “late”, it could be considered as a breach of fiduciary duty and a prohibited transaction. In this case, the plan administrator will have to reimburse all participants for the lost earnings due to the delay in the transmission of the funds.

 Do you have a Fidelity Bond?

DOL regulations states, “as an additional protection for plans, those who handle plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.” The bond must name the Plan as the insured (not the employer) and include willful/ knowledgeable misconduct such as fraud as being covered under the policy. If you don’t purchase and maintain a sufficient ERISA fidelity bond, it can be a red flag to DOL that invites them to take a closer look at your plan

How much coverage must the bond provide? Your fidelity bond must be for at least 10% of plan assets with a minimum of $1,000 per plan and a maximum of $500,000 per plan. Generally, DOL, EPL and related insurance policies are not adequate to meet the requirements related to this coverage.

Look for future posts for additional areas of concern.

See Part 2 of this post.

Categories: Contributions, Employee Benefits, General Information, Operational Issues
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One Response to “Hidden Rules of the 401(k) and 403(b) – Part 1”

  1. Mission: Accountable » Blog Archive » Hidden Rules of the 401(k) and 403(b) – Part 2 Says:

    [...] See Part 1 of this post Categories: Contributions, Employee Benefits, General Information, Operational Issues Tags: 401k, 403(b), Benefit Plan, employee contributions, Retirement Plan, spousal consent [...]

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