Common, Costly Mistakes Employee Plan Sponsors Make

April 3, 2024
The process of plan administration is complex and failure can result in hefty fines

There is a reason 91% of employee plan sponsors outsource some or all of their plan’s administration to a third party administrator (TPA). The process of plan administration is complex and failure to meet their fiduciary requirements can result in hefty fines and even criminal charges. Still, some plan sponsors elect to manage their employee benefits in-house which can and often does lead to various mistakes and the risk of penalties. Here are some of the more common errors plan administrators make:

  • Not promptly updating the written plan document, which is a requirement of the Internal Revenue Service (IRS).
  • Not making timely deposits of employee contributions into qualified retirement plans which the Department of Labor (DOL) requires should be made within a reasonable time out of the employer’s general assets but no later than the 15th business day of the following month.
  • Improperly calculating matching contributions and not making matching and profit-sharing contributions on a timely basis, the timeframe for which may be outlined in the plan document. If not, it would be based on the deadline noted in IRC404 (a) which notes that matching and profit-sharing contributions be made by the due date of the employer’s tax return for that year including extensions. Different due dates apply for tax-exempt organizations.
  • Not having a plan document and summary plan description as required by ERISA.
  • Not adhering to the plan’s terms of operation or using incorrect definitions of compensation when allocating contributions to plan participants.
  • Not meeting non-discrimination testing requirements including those tests for top-heavy plans, actual contribution percentage, and actual deferral percentage.
  • Making late deferral deposits to participant accounts to compensate participants for lost investment gains.
  • Failing to communicate to plan participants any summary plan description changes.
  • Misclassifying individuals as independent contractors and other errors relating to independent contractors or temporary employees (i.e., not including independent contractors in health plan coverage, excluding temporary employees from benefit plan coverage).

Mistakes Lead to Increased Costs

These are just some of the common errors plan sponsors make in the administration of employee benefits. Some of these can result in significant costs to plan sponsors. For example, not providing a summary plan description to a plan participant within 30 days of his/her request carries a maximum penalty of $110 per day penalty measured from 30 days after the date the request was made. In another example, failure of a plan sponsor to prepare formal plan documents in accordance with ERISA can lead to a plan participant’s filing of a lawsuit in accordance with ERISA’s general enforcement provisions which can lead to criminal penalties against an organization or individual that willfully violated Title 1 of ERISA. Penalties can be as high as $100,000 and a ten-year prison term or $500,000 for a company.