As auditors of many employee benefit plans, our firm continually seeks to help sponsors recognize their duty to safeguard participant assets. Plan sponsors have a fiduciary responsibility to ensure that their qualified plan complies with all current employee benefits laws and regulations. In addition, they must make certain that the plan functions within the plan’s current provisions. One of the most effective ways to do this is for plan sponsors to review the plan annually.

IRS checklist

To assist plan sponsors, the IRS has prepared a 401(k) plan checklist. The checklist summarizes major compliance issues; however, the IRS doesn’t intend for plan sponsors to 401(k)_planuse it as a comprehensive guide. It provides general definitions, examples and methods for correcting possible errors.

Because of the complexity of various plan provisions and correction methods, plan sponsors should consult their benefits specialist or visit the IRS website for additional information.

10 important compliance areas

When focusing on important compliance areas, consider these 10 questions:

1. Have you updated your plan to reflect recent law changes? Some regulatory changes offer optional benefits while others provide for a mandatory change for all plans. The new laws also provide additional benefits and protection to plan participants. For example, the Pension Protection Act (PPA) allows participants to roll over distributions to a Roth IRA.

2. Is the plan operating according to the plan document’s terms? Even though a plan may have several advisors, ranging from third-party administrators to ERISA attorneys, the plan sponsor is responsible for ensuring that the plan complies with all laws.

When the plan sponsors change a plan provision, they must take appropriate steps to ensure that the change functions properly. Some questions to consider include: Was a plan amendment required? Were plan advisors made aware of the changes? Were plan participants notified of the change? Work with colleagues and advisors to make the necessary changes and adjustments where appropriate.

3. Is the plan’s definition of compensation for deferrals and allocations used correctly? The plan defines what income is “compensation” for plan purposes and usually states whether the definition includes items such as fringe benefits and bonuses. The IRS has set a cap on the total compensation permitted for contribution purposes. The 2016 cap is $265,000.

Plan sponsors should know the annual deferral limits and what limit the plan allows. For example, some plans allow maximum deferral contributions following the IRS regulations, while some plans cap the deferral limit for employees.

4. Were employer-matching contributions made to appropriate employees under the plan’s terms? The plan’s terms will set eligibility requirements, hours of service rules and entry dates for determining who receives employer-matching contributions. Plan sponsors must use the contribution formula in the plan document. The definition of compensation comes into play to properly calculate contributions.

5. Has the plan satisfied the 401(k) plan nondiscrimination tests (ADP and ACP)? The plan administrator must test the plan annually to determine the ratio between contributions by non-highly compensated employees and highly compensated employees to ensure that the plan isn’t solely benefiting highly paid employees.

6. Were all eligible employees identified and given the opportunity to make an elective deferral? The plan outlines when an employee becomes eligible to participate in the plan. This generally includes a combination based on age, service and hours worked. The plan sponsor can’t deny any employees the opportunity to defer so long as they meet the plan requirements.

7. Do elective deferrals meet the IRS limit for the calendar year, and did the plan distribute excess deferrals? The IRS limits the amount a plan participant can defer into the plan. Participants age 50 or older can make a catch-up contribution, if allowed by the plan document.

If a participant defers more than the allowable limit, the plan administrator must withdraw the excess deferral from the participant’s account by April 15 of the year following the year the excess deferral occurred.

8. Did the employer timely deposit employee elective deferrals? The employer is responsible for timely depositing elective deferrals. The Department of Labor (DOL) requires the employer to deposit deferrals as soon as reasonably possible. For plans with fewer than 100 participants, the DOL mandates a seven-business-day safe harbor rule. If the employer fails to make timely deposits, the plan may have engaged in a prohibited transaction and the IRS may disqualify the plan.

9. Do participant loans follow plan document requirements? The plan document will outline the rules for plan loans, and if allowed, the loan’s parameters. Plan administrators must follow the plan’s loan provisions to avoid a prohibited transaction.

10. Did the plan administrator follow hardship distribution rules? The IRS allows hardship distributions for immediate and heavy financial need. If a plan uses the “facts and circumstances” provisions, the employer determines if a hardship qualifies. Under the safe harbor approach, the IRS outlines six cases in which a participant qualifies (medical, tuition, funeral, primary home damage, eviction and home purchase). The calculation and required documentation for hardship loans can be complex, so it’s important to follow the plan’s provisions to avoid penalties.

Beyond the checklist

Retirement plans are complex, and plan sponsors should understand the questions presented in this article in addition to all other plan document provisions. Plus, as plan fiduciary, you must also periodically review your hired advisors, plan fees and investment allocations. You can find the IRS checklist and more information on the IRS’s website, And if you have any questions about your retirement plan, be sure to contact one of our advisors.