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7 Common Mistakes you find in Retirement Plans for Small Businesses

by Caldwell Trust

As a small business owner, sometimes it can be challenging to run a business and, at the same time, make sure that your retirement plan is being administered correctly and kept in compliance with IRS and DOL regulations.

Here are seven common mistakes that can get plans and plan sponsors in trouble.



1. Not Keeping Your Plan Document Up to Date

Your plan document is the single most important document regarding your plan. It contains all of the provisions and operational procedures for your plan. Essentially, it describes what can or cannot be done in your plan.


As such, this document needs to be updated when the tax laws affecting retirement plans are changed. The IRS generally establishes a firm deadline by which plan amendments (or re-statements) reflecting tax law changes must be adopted. Failure to do so could result in plan disqualification and penalties.


If you don’t remember the last time you updated your plan, you are probably overdue.


Related Blog: Frequently Asked Questions About Retirement Planning


2. Failure to Follow Up Eligibility and Vesting Provisions

The plan document spells out when employees are eligible to begin participating in the plan, as well as their rights to retirement benefits. The formulas to determine such benefits are based on the correct application of service and/or age requirements of the plan regarding eligibility for participation as well as the proper application of vesting schedules.


To comply with these requirements, you must maintain accurate service records for each employee. If these records are incorrect, the benefit provided may also be incorrect—either more than what is permissible or less than what is actually due to the participant.


3. Not Depositing Participant Contributions on a Timely Basis

The legal requirements for depositing employee contributions to the plan are perhaps the most widely misunderstood elements of plan administration.


A delay in depositing employee contributions is one of the most common “flags” that an employer is in financial trouble – and that the Department of Labor is likely to investigate.


Department of Labor regulations require that participant contributions be deposited in the plan “as soon as it is reasonably possible” to segregate them from the Employer’s assets, but no later than the 15th business day of the month following the payday.


If the employer can reasonably make the deposit sooner, they need to do so. The 15th day is the worst-case scenario and many employers have read this to be the legal requirement. It is not.


Furthermore, for small plans (plans with less than 100 eligible employees), the requirement is seven days after the pay period (sooner if possible).


Related Blog: The Role Your Retirement Plan Option Plays in Recruiting Top Talent


4. Not Starting Required Minimum Distributions (RMDs) on Time

A qualified retirement plan (such as a 401(k)) is required to make a minimum distribution payment to participants who have attained the age of 70 ½. The required beginning date (RBD) for the distribution, for a participant who is not a 5% owner, is April 1st following the end of the calendar year in which the later of two events occurs: either the participant reaches age 70 ½ or the participant retires.


If the participant is a 5% owner, the RBD is April 1st following the end of the calendar year in which they attain age 70 ½ regardless of their retirement age.


Plan sponsors often discover that required minimum payments either have not been paid on time or have not been paid at all, especially when a non-5% owner continues to work past age 70 ½. Failure to follow the minimum distribution rules as stated in the plan document can lead to the loss of the plan’s tax-qualified status.


On the other hand, if participants or beneficiaries do not receive their minimum distribution on time, they – not the plan – are subject to a 50% additional tax on the amount not paid.


5. Not Following the Terms of the Plan Document Regarding the Administration of Loan Provisions (Amount of Loan, Repayment Schedules, etc.) or Hardship Withdrawals

Plan documents routinely provide for hardship distributions, such distributions can only be obtained for certain very specific reasons. Similarly, loans are permissible (if allowed by the plan document) only when they comply with certain standards regarding the amount, purpose and repayment terms.


Failure to ensure that these legal requirements are met can result in distributions that are not authorized under the terms of the plan document. And since these types of distributions are often spent quickly by participants, and thus not easily recoverable, it can be complicated and time-consuming to set the situation right.


Related Blog: Retirement Planning Options for Your Business: The Difference Between Cash Balance and 401(k) Plans



6. Failing to Obtain Spousal Consent

A common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of the form other than those listed.


The requires Qualified Joint & Survivor Annuity (QJSA) (e.g., a single Lump Sum Distribution) without securing proper consent from the spouse. This often happens when employers HR system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently married or remarried).


Failure to provide proper spousal consent is an operational qualification mistake that could cause the plan to lose its tax-qualified status.


7. Paying Expenses from the Plan that are Not Eligible to be Paid from the Plan

The Department of Labor (DOL) divides plan expenses into two categories: so-called “settlor expenses,” which must be paid for by the employer; and “administrative expenses,” which—if they are reasonable—may be paid from plan assets.


In general, settlor expenses include the cost of any service provided to establish, terminate or design the plan.


Administrative expenses, on the other hand, include fees and cost associated with things like amending the plan to keep it in compliance with tax laws, performing discrimination testing, record-keeping services or providing plan information to participants.


Available Guidance 

As for plans that fall short of any of the above, Caldwell Trust Company has resources available to help you identify these problems before they occur and can help you fix them if they do occur.


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