Autumn - the season for a 401(k) Plan review
"Change before you have to"
-- Jack Welch
Autumn is my favorite season. A time when the hustle and bustle of the summer gently transitions into a more consistent routine that seems to coincide with the peaceful color changes in the leaves. It is also a time that provides an opportunity to review and reflect on the activities of the prior months and prepare for the upcoming winter holiday season, and the inevitable New Year.
In the retirement consulting or TPA (Third Party Administration) field, it is also when I encourage all 401(k) Plan sponsors to take a look at their plan. Both to review the prior year challenges and touch base with service providers, as well as bring focus to their goals for the future.
Change is constant in the retirement planning world and many changes are out of the hands of both the plan participants and business owners who provide retirement benefit programs.
“An unsolicited surprise, is rarely received as positive change.”
As in many other areas of life, a small amount of attention and planning with regard to your retirement plan’s health is critical in ensuring smooth operations and avoiding costly or time consuming issues that can arise due to any number of factors that fly under the radar for many small business owners.
By proactively scheduling time in the fall, business owners can not only check in regarding legislative or regulatory changes that might be on the horizon, but also have the opportunity to analyze their plan’s current year status while there is still enough time left before year end to elect changes or upgrades if needed or desired.
5 preventable unpleasant 401(k) surprises:
- Top Heavy Contribution Costs - Top Heavy status for the current plan year was established at the close of the prior plan year. Unfortunately many plan sponsors don’t know what a “Top Heavy Plan” means from a hard-dollar standpoint or what options are available to avoid a potentially expensive required contribution.
- ADP / ACP Testing Failure - Plans that are subject to deferral and matching contribution testing can benefit from a preliminary review of year to date contributions projected through year end. Identifying a possible issue now, allows room to explore changes that could prevent or minimize the issue and corrective costs.
- Coverage Testing Failure - If your business has gone through a merger or acquisition during the year, or if you or your spouse have started a new business venture, unexpected coverage issues can wreak havoc on your plan compliance and budget. The costs associated with a coverage correction are often disproportionately high to the expense of reviewing prospectively and addressing issues before year end.
- Late Deposit Corrections - Deposit of employee deferral contributions and loan payments are subject to a very tight timeline. Failure to meet that timeline is reportable on the Form 5500 annual plan return and requires correction in the form of lost earnings calculated and deposited by the employer. By correcting within the plan year, sponsors limit reporting the violation to a single year’s return, as well as minimize the lost earnings cost since the earnings expense continues to accrue until the date of correction.
- Compensation Discrimination - For plans that utilize a modified definition of compensation for calculating employer contributions reviewing projected wages prior to year end allows time for adjustments to ensure passing results by year end.