Costly HR & Employee Mistakes: Part 1

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Mistakes in employee benefits and human resources can be quite costly to employers—in the form of extra benefits, complaints, lawsuits, government-assessed fines and penalties, and attorney fees, to name a few. Don’t learn the hard way what these mistakes are.  Below are some common costly mistakes that employers make.

  1. Not timely depositing employee contributions into qualified retirement plans. Employers sometimes wait too long to deposit salary deferrals into a qualified retirement plan. According to the Department of Labor (DOL), such deposits should be made as soon as the contributions can be reasonably segregated from the employer’s general assets, but no later than the 15th business day of the following month. The 15th business day of the following month is an outside guideline, and deposits must be made sooner if possible. If deposits are not timely made, the DOL and Internal Revenue Service (IRS) may levy fines, penalties and retroactive earnings for late contributions. The deposit rule for salary deferrals applies to all types of employee contributions, including special deferrals (such as catch-up contributions), after-tax contributions and loan repayments.
  • The DOL has established a safe harbor for employers with small plans (fewer than 100 participants at the beginning of the plan year) to timely deposit such employee contributions. Under the safe harbor, if the employer deposits the withheld amounts in the plan no later than the seventh business day following the date the employees would have received the contributions (payday), the employer automatically satisfies the requirement to timely deposit employee contributions.
  • Solution: Deposit employee contributions as soon as reasonably possible following issuance of the paycheck from which the contribution was withheld. Employers with small plans should try to take advantage of the safe harbor’s protection by depositing employee contributions within seven business days from the issuance of the paycheck. The DOL’s Voluntary Fiduciary Correction Program (VFCP) offers a method to correct late deposits of employee contributions.

 

  1. Not making matching and profit-sharing contributions on a timely basis. Many employers make the mistake of not making these contributions on a timely basis. If your qualified retirement plan provides for matching and profit-sharing contributions, the deadline for making these contributions and depositing them into the plan’s trust is determined first by looking to the plan document. The plan document may contain deadlines for these contributions. For example, the plan document may require matching contributions to be deposited each pay period.
  • If the plan document is silent on this issue or requires contributions to be made by the date required by law, then the deadline generally will be determined by IRC 404(a). IRC 404(a) provides that matching and profit-sharing contributions for a plan year must be made by the due date of the employer’s tax return for that year, including extensions. For tax-exempt employers, the IRC deadline is generally the 15th day of the 10th month following the close of the employer’s tax year. If contributions are not made on a timely basis, the same penalties as above apply.
  • Solution: Read your plan documents and understand when matching and profit-sharing contributions must be made.

 

  1. Incorrectly computing matching contributions. A typical matching contribution formula provides that an employer will pay 50 cents for each $1 an employee contributes to the plan on a pre-tax or Roth basis up to 6 percent of compensation, which results in a maximum employer matching contribution of 3 percent of compensation. It is most common for plan administrators and payroll systems to calculate matching contributions on a weekly payroll-by-payroll basis. If an employee earning $60,000 a year makes the 6 percent contribution throughout the year on a payroll-by-payroll basis, the employee will contribute $3,600 to the plan, and the employer will provide a matching contribution equal to $1,800. Assume another employee earning the same base pay contributes 12 percent for 6 months. This employee has also contributed a total of $3,600 to the plan, but will only receive a $900 match. This same scenario also often occurs with executives who receive large bonuses early in the year and request the maximum contribution be withheld from the bonus.
  • Solution: Some employers make “make-up” contributions at the end of the year to ensure that employees making the same annual salary deferrals receive the same matching contributions. If employers are using a Prototype plan, make-up contributions may not be a viable option. In this case, educating employees on the implications of changing deferral elections and limits is important. If matching contributions are not calculated correctly or in accordance with the plan document, the IRS’s Employee Plans Compliance Resolution System (EPCRS) may allow the employer to correct the error by following a correction method approved by the IRS.

 

  1. Late enrollment of employees into qualified retirement plans. Employers often fail to timely enroll employees in qualified retirement plans, and sometimes even try to exclude part-time employees from participation. A qualified retirement plan is not required to cover all of an employer’s employees. For example, a plan generally may limit participation to certain groups of employees, as long as the plan satisfies minimum coverage and nondiscrimination requirements. In addition, a qualified retirement plan may exclude an employee based on age (up to 21) or service (generally up to one year of service in which he or she is credited with at least 1,000 hours of service), but not based on part-time status. Also, former employees who are rehired who had completed the plan’s eligibility requirements before terminating may begin participating immediately upon rehire, unless the employee’s original entry date would have been later, in which case the later entry date applies.
  • If you wrongfully exclude employees, you can jeopardize the plan’s tax-qualified status. If the error is discovered in an audit, the DOL and IRS may levy retroactive employer contributions, elective deferrals and earnings for employees that were wrongfully excluded. Excluding eligible employees from participation is a mistake that may be corrected under EPCRS. The IRS-approved correction for failing to allow an employee to make elective deferrals for part of a plan year is to make an employer contribution equal to 50 percent of the “average deferral percentage” of the employee’s group (either highly or non-highly compensated), multiplied by the employee’s compensation for that part of the year.
  • Solution: Include in the retirement plan all employees that work at least 1,000 hours in a 12-month period (unless such employees are excluded based on a “service-neutral” classification). Closely monitor employees’ attainment of the plan’s eligibility criteria and timely provide eligibility information to plan service providers.

 

  1. No plan document or summary plan description. ERISA requires that employee benefit plans be maintained pursuant to a written instrument and that participants receive a summary plan description (SPD) that contains certain information. The DOL has a rule defining what needs to be in an SPD. Many employers rely on their insurance carriers or TPAs to provide booklets to distribute to employees. Often the booklets provided by carriers and TPAs do not contain all of the information that is required in an SPD and/or will not qualify as a plan document. This is often the case with health and welfare plans.
  • Failure to provide a plan participant with an SPD within 30 days of an employee request carries a maximum $110 per day penalty (measured from the date that is 30 days after the request). There is no specific penalty for failure to maintain a plan document, but pursuant to ERISA’s general enforcement provisions, any plan participant can bring a lawsuit to require a plan sponsor to prepare a formal plan document where none exists. Criminal penalties may be levied upon any individual or company that willfully violates Title I of ERISA, which could include these disclosure rules (maximums are $100,000 and ten years in prison or $500,000 for a company). Moreover, failing to maintain an updated plan document and/or SPD may jeopardize an employer’s chance of success in a legal dispute with an employee over benefits.
  • Solution: Have an SPD and plan document prepared for each plan your company sponsors, and keep the documents up to date. In some cases, a simple “wrap document” may suffice to supplement the information provided by the insurance company or TPA. The wrap document fills in the gaps of what you have and what is legally required and can apply to more than one plan.
2019-03-07T20:31:08-05:00