Another provision an employer with a 401(k) plan might want to implement is an automatic enrollment feature, such as an Eligible Automatic Contribution Arrangement ("EACA").  With an EACA, the employer may choose to increase the default enrollment percentage rate each year (up to a certain maximum) for participants automatically enrolled.  In addition, the employer may choose to allow newly automatically enrolled participants to opt-out within the first 90 days of enrollment, receiving a refund of their deferrals made under the EACA. 

Advantages of an EACA include helping employees save for their retirement and boosting the deferral percentage of the non-highly compensated employees (which helps with passing the ADP test).  Another advantage of an EACA (one that covers all eligible employees), is that the employer is given extra time by which to complete annual non-discrimination testing and to make refunds of any deferrals without triggering a 10 percent excise tax on the employer (an extra 3 ½ months).

Other common plan provision changes employers may make include amending the plan to add employer matching and/or non-matching (profit-sharing) contribution provisions, or to change existing allocation formulas of such.  

Whatever the change, sufficient time is needed for the employer to amend the plan and to notify participants, especially where participants must be provided a notice of at least 30 days in advance – another reason why a good time for the plan's "Annual Check-up" is now.

Next: Take a look at the operation of the plan

Operation of the Plan

According to past Internal Revenue Service forums, some of the most common errors in plan operation include the following:

• Late deposits of employee deferrals and loan repayments, which is also a prohibited transaction that may be corrected through the DOL's Voluntary Fiduciary Correction Program.  For a "small" plan (generally, a plan with less than 100 participants as of the first day of the plan year), the requirement is to deposit the withheld amounts within 7 business days of withholding. For a "large" plan (generally, a plan with 100+ participants as of the first day of the plan year), the deposit requirement is more complicated. Essentially, the requirement is to deposit as soon as reasonably feasible, but no later than the 15^th business day of the month following the month withheld. Under audit, the DOL reviews the employer's/plan's entire deposit history, and generally uses the quickest deposit time-period the employer made as the employer's deposit standard. For example: If the employer usually deposits within 10 business day of withholding, but on at least one occasion made a deposit within 6 business days, it is highly likely that the DOL will determine the employer's requirement for making all deposits should have been within 6 business days. Under these circumstances, the DOL will generally require the employer to make-up lost earnings, based upon a deposit standard of 6 business days, for all deposits make later than within 6 business days. This is why it is critical for a plan to know its deposit standard, and to review (perhaps more than annually), its deposit procedures and actual dates of deposit.
• Failure to follow the terms of the plan, such as not using the correct definition of compensation for purposes of deferrals or allocations of employer contributions, or allowing employees early/late into the plan.  Failures can be corrected using one of the IRS' correction programs (currently described in Revenue Procedure 2008-50). Some of the corrections require a filing with the IRS (along with a filing fee). Where employees were allowed late into a 401(k) plan, the correction generally requires the employer to make-up lost deferrals and any employer contributions, plus any earnings. The longer the period from the error to the date of discovery and correction, the more costly to the employer.  To help minimize costs of correction, an annual (or more frequent) review of the plan's provisions and its operation is advisable.
• Failure to suspend deferrals for six months in a 401(k) plan when a participant takes a hardship withdrawal. The correction is generally to refund the employee any deferrals made during the required suspension period and forfeit any matching contributions on such, which can frustrate the employee. In addition, should the value of the deferrals at the time of the refund be less than the amount contributed, the employer might have to make-up the difference.
• Failure to satisfy non-discrimination tests, such as the ADP test.  A failed ADP test must be corrected within 12 months of the failure, or otherwise the plan risks disqualification. Generally, the correction of a failed test is made by (i) refunding excess contributions (plus earnings) to one or more highly compensated employees, (ii) funding an employer contribution that is 100 percent vested immediately to non-highly compensated employees, or (iii) a combination of (i) and (ii). Where any refunds are made after 2 ½ months following the plan year of the failure (or after 6 months if the plan has an EACA, described earlier), a 50 percent excise tax on the employer is triggered.  Where the employer funds a contribution, the amount can be costly. If refunds are made, the affected highly compensated employees are usually less-than-ecstatic, since the refunds represent additional taxable income.  Although the employer might not be able to avoid many of the costs to correct a failed ADP test, the employer can avoid any possible plan disqualification. Now that would be costly. 

Next: Additional issues to review during the Annual Check-up

Additional issues to review during the Annual Check-up

The final two issues I'm listing in this blog for an employer, fiduciary, and/or advisor to review are the filing of the Form 5500 and payment of any Required Minimum Distributions ("RMDs"). 

Ensure that the Form 5500, along with all schedules and attachments, is filed – and better yet, timely filed.  Even if the filing is late, the DOL has a correction program, the Delinquent Filer Voluntary Compliance Program, which can reduce any penalties – or at least help avoid additional problems by not filing, or waiting until the DOL contacts the employer for failure to file. 

Failure to file a Form 5500 and/or to timely file a Form 5500 triggers both IRS and DOL late filing fees ($25 and $1,100 per day, respectively) and possible personal liability on the part of the plan administrator.

Last, ensure that any Required Minimum Distributions ("RMDs") have been, or will be, timely made.  Participants who are 5 percent+ owners must start receiving an RMD by at least April 1^st of the year following the calendar year in which they attained age 70 ½, and each December 31^st thereafter. 

Plans may provide that all other participants who are at least age 70 ½ and still employed may defer the start date of their RMD until their retirement date.  Failure to timely provide an RMD subjects the affected participant to a 50 percent excise tax on the RMD amount in question, for which in all likelihood, the participant will seek reimbursement from the party at fault.

Have you scheduled the plan's Annual Check-up? If not, I recommend you do so soon.