Risk Assessment - Results of Exams of Form 5500 401(k) Plans - Sponsors From the Administrative & Support, Waste Management & Remediation Industry
This is a summary of the examinations completed in the market segment made up of 401(k) Plans sponsored by the Administrative & Support, Waste Management & Remediation Industry. As of August 2011, we had examined over 700 Form 5500 filings.
The results indicated that there was a high degree of Noncompliance within this segment. There are two key areas to discuss in this article, plan sponsor business code analysis and the issues found. Each Industry (i.e. Administrative & Support, Waste Management & Remediation) has business codes based on the North American Industry Classification System (NAICS). The Administrative & Support, Waste Management & Remediation Industry has 18 business codes. Over 86% of this segment’s universe have plan sponsor’s who use just 11 of the 18 business codes. We found substantial data in our examinations that the plans whose sponsors used these 11 business codes had a high degree of Noncompliance. Although we did not have quite as much data on plan sponsors who used the other seven business codes it appeared that Noncompliance was high for those as well. Noncompliance was especially high with plan sponsors using the business codes representing “Business Service Centers (including repossession services, court reporting, & stenotype services)” and “Investigation & Security” Services.
The most common failure involves errors in the ADP/ACP testing and in the timely depositing of the 401k deferrals. The tests are detailed in Internal Revenue Code sections 401(k)(3) and 401(m)(3). Common errors in the tests are not properly identifying highly compensated employees, improperly including or excluding employees on the test and using the wrong compensation and/or contribution amounts. Another area we found a number of problems with was not timely depositing the employee deferrals.
Avoid the error The best way to avoid these problems is too make sure all the people responsible for running the tests are knowledgeable in the law [Internal Revenue Code sections 401(k)/(m)]. This includes knowing what contribution amounts are used, the employee compensation to use, properly determining Highly Compensated or Non Highly Compensated employees, and what yearly period to use in applying the testing. See item #5 of the 401(k) Fix-It Guide for more ways to avoid this error.
Those responsible for administering the amounts employees elect to contribute to the plan should timely deposit these monies. The Department of Labor regulations requires one to deposit employee deferrals as soon as you segregate them. See item #8 of the
The second most prevalent failure involves errors in allocating contributions to the plan participants. Allocation errors occur when the contribution is not allocating in the manner in which the plan document states it should. Common examples include using the wrong compensation definition, including or excluding certain employees and enforcing or failing to enforce allocation requirements per the plan document (i.e. last day employment, certain hours of service).
Avoid the error 401(k) plans can have multiple types of contributions being allocated to the plan. In addition to tax deferred contributions, there could be employee after tax contributions, employer matching contributions, and employer discretionary contributions. The best way to avoid allocation problems is too make sure all the people responsible for the allocations know the correct and most current allocation formulas. They must know the correct and most current definition of compensation being used in the formulas and assure it is used in the calculations. Finally, they must also know whether or not the plan calls for forfeitures to be allocated to participants (in addition to amounts required by the plan formula), and if so the allocation formula.