One of the most obvious fiduciary requirements is to follow the terms of your plan document, as long as those terms are consistent with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. That clause—as long as they are consistent with ERISA— is always the tricky one. Why is that?
Often we hear of the newly hired human resources employee who is simply “taught” by his or her predecessor how to handle the retirement plan functions. The workflow, administrative, and reconciliation processes that have been in place are simply followed by each successive plan administrator. The new employee paid attention, took notes, and diligently carried out the instructions as taught. Perhaps even you have had this experience.
You are asked whether the plan allows a loan. Yes, you explain. Follow these procedures, complete this application, attach the documentation, and we will authorize the loan as long as the requirements are met. What is the maximum loan available? You confidently respond that the participant may borrow up to 50 percent of her vested account balance, to a maximum of $50,000. This is precisely what you were taught, what your plan has always done, and what your plan document states. We should always follow the plan document, right? Well, only if the document is consistent with ERISA. Here, one key step is missing.
In this example, the consultant the employer hired to conduct the self-audit discovered that the plan document had left off one important point in describing loan maximums. That is, the legal requirement that when a participant applies for a loan, the plan must look to see whether that participant had a plan loan within the last 12 months. If so, then the highest outstanding loan balance over the most recent 12 months must be deducted from the maximum amount described above. This significantly reduces the maximum loan amount available to a number of participants. Failure to follow this step in loan processing places the retirement plan out of compliance with ERISA. The regulations on maximum loan amounts are clear. Yet, on occasion, a plan document will omit this requirement. On other occasions, a plan document may include it, but staff only follow what they are taught, rather than read the document themselves and learn ERISA! Failure to process participant loans properly is one of the more common failures the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) see as they accept retirement-plan-correction applications.
To reduce your risk of fees, penalty assessments, participant or class-action lawsuits, and even potential plan disqualification, sponsors are encouraged to monitor their plan administration and conduct periodic self-audits on plan documents and operating procedures. Quite often, plans that begin routine audits will catch their errors well before a participant claim or an agency auditor steps in. By self-identifying plan errors, following agency procedures, and making the required corrections, plan sponsors are able to save significant sums of money, enhance employee relations, and protect their company’s reputation from negative publicity.
Some of the common errors found in self-audits and the agency process offered to correct, document, and protect the plan in the future are shown below. There are many types of errors not listed here. The corrections may be time intensive and many plan sponsors obtain assistance from their plan providers, third party administrators, plan auditors, and ERISA attorneys.
Common Errors and Correction Programs Available:
- Missed Form 5500 filings: Delinquent Filers Voluntary Compliance Program (DFVC) with DOL
- Delayed Deposit of Employee Deferrals: Voluntary Fiduciary Correction Program (VFCP) with DOL; may also need to follow up with an IRS Employee Plans Compliance Resolution Systems (EPCRS) program
- Plan Loan Errors: one of the EPCRS programs with the IRS; then Voluntary Compliance Procedure with DOL
- Overpayment/Underpayment Errors: one of the EPCRS programs with the IRS. (Three are offered and the facts determine which is most appropriate.)
- Failure to Adopt Plan Amendments: an EPCRS program with the IRS. [Refer to IRS Notice 2014-84 for the list of Plan Qualification Requirements: http://www.irs.gov/irb/2013-52_IRB/ar13.html]
- Conflicting Definitions of Eligible Compensation: one of the EPCRS programs with the IRS
- Failed Non-Discrimination Tests: one of the EPCRS programs with the IRS