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July 2005
401(k) plans: top ten compliance issues 
Submitted by: Joyce Skinner
As a result of recent 401(k) plan monitoring, the Internal Revenue Service has identified the ten most common compliance issues found during plan examinations. These issues are summarized below:
- Late deposit of 401(k) deferrals
Employers are required to deposit salary deferrals for 401(k) plans as of the earliest date on which such amounts can reasonably be segregated from the employer's general assets. In no event may salary deferrals be deposited later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash. Many employers have misinterpreted this rule, believing that it provides them with a "safe harbor" that allows them to delay deposit until the 15th business day of the following month, regardless of whether amounts can be segregated on an earlier date. This is not a safe harbor. Rather, it sets a maximum deadline for depositing contributions.
- Improper 401(k) accelerated deductions
Employers are improperly claiming a deduction on their current year federal income tax return that relates to 401(k) deferrals made on account of, and paid during, the subsequent tax year. If the transaction is not corrected timely or disclosed properly, the employer may be liable for penalties in addition to any income taxes due.
- Failure to use correct compensation
Plan administrators are using the incorrect definition of compensation when calculating the Average Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests; computing the salary deferral and employer matching contributions; and verifying that contribution limitations are satisfied. Employers and plan administrators need to be familiar with the terms of the plan document to ensure that they use the proper definition of compensation.
- Improper exclusion of eligible employees for purposes of ADP and/or ACP testing
When conducting the ADP test, plan administrators are improperly excluding eligible part-time employees, non-deferring employees who begin or terminate participation during a plan year, and/or those employees who simply choose not to defer. When conducting the ACP test, plan administrators are improperly excluding employees, who are eligible under the plan to make employee contributions or to receive an allocation of matching contributions, but choose not to make employee contributions or do not receive any matching contributions. Another problem occurs when the population of eligible employees is different for ADP and ACP testing purposes and the plan administrator does not differentiate when conducting the tests.
- Misclassification of highly and non-highly compensated employees
Plan administrators are misclassifying highly and non-highly compensated employees for purposes of ADP and ACP testing. Misclassification often occurs when the administrator fails to review prior year compensation, consider the attribution rules related to ownership when identifying 5% owners, and/or comply with the plan document in instances where it provides for the top-paid election.
- Failure to timely correct ADP and/or ACP failures
Plan administrators are failing to take proper corrective action after finding that plans fail the ADP and/or ACP test. Corrective action, described in the plan document, must be taken within 12 months following the end of the plan year to which the excess contributions or excess aggregate contributions relate.
- Incorrect employer matching contributions
Employers are failing to contribute the employer matching contribution provided for under the terms of the plan document. In many cases, the problem is caused by the employer's and/or plan administrator's failure to properly count hours of service or identify plan entry dates for employees. Other common problems include the failure to use the definition of compensation described in the plan document and improper timing of matching contributions.
- Deferrals in excess of IRC section 402(g) limits
Employers are improperly allowing employees to defer compensation amounts in excess of the 402(g) dollar limitations. Employers need to ensure that they have a system in place to monitor salary deferrals for those employees who participate in more than one plan of the employer.
- Fail-safe provisions in a 401(k) Safe Harbor Plan
Employers concerned with a possible failure to follow safe harbor provisions contained in their 401(k) plans, are opting to include "fail-safe" language in their plan document. Generally, the fail-safe language provides that if the plan fails to comply with its safe harbor provisions, it may fall back on the ADP and/or ACP test to meet nondiscrimination requirements. This language is not permissible.
- Failure to meet hardship distribution requirements
In 401(k) plans that offer participant loans and hardship distributions, plan administrators are allowing hardship distributions to participants who elect not to take out a plan loan to satisfy the hardship. This fails to satisfy the hardship distribution rules that provide that a hardship distribution may not be made to the extent that the need may be satisfied from other resources that are reasonably available to the employee.
Published: July 2005 RSM McGladrey Electronic Resource Center.
For more information on the above topics, please contact Joyce Skinner at 256-533-1720 or email at jskinner@beasonnalley.com.
Improving economy signals need for strategic approach to employee retention
Submitted by: Carolyn Scarborough, Human Resources Consultant
The next time you lead a staff meeting, consider this thought: About three of every four people in the room may be thinking about another job.
In a poll conducted by the Society for Human Resource Management (SHRM) and the Wall Street Journal, 78 percent of workers currently employed said they were likely to start or accelerate a job search as the economy improves. Fully 65 percent of executives polled said they were actively looking for new employment, compared with 47 percent of non-management workers and 45 percent of middle managers.
While those numbers mirror findings from several other recent studies on employee retention, most companies have yet to take the issue seriously. According to the SHRM report, two-thirds of human resources professionals surveyed said their firms had no strategies in place to anticipate and reduce turnover. For one noted human resources expert, that approach is a lost opportunity to "re-recruit" key workers who may well have one foot out the door.
"Too many companies are forgetting all the work that went into hiring these people - interviews, background checks, and perhaps even a bit of persuasion to bring them onboard," says Roger Herman, president of the Workforce Stability Institute in Greensboro, N.C. "The smart employers are those who build on that original investment by helping employees gain new skills or prepare for more challenging responsibilities - while consistently providing market-competitive pay and benefits."
The benefits issue is of increasing concern to workers. According to the SHRM Career Journal study, 68 percent of employees ranked solid medical, dental and retirement benefits as the most important aspect of job satisfaction. Interestingly, human resources professionals responding to a companion survey rated benefits as the third most important issue for workers, behind the relationship with direct supervisors and recognition of job performance.
In a recent RSM McGladrey Advantage Quick Poll, over 68 percent of the respondents said they use flexible work arrangements and professional development as tools to retain key employees, while just 15 percent use stock options as a retention tool.
In the Quick Poll, 72 percent thought non-management or staff positions are at highest risk of turnover in the year ahead. Only 1 percent of respondents said the same of executive-level jobs.
Jennifer Schramm, SHRM's manager of workforce trends and forecasting, says that the perception gap between worker and employer shouldn't be misunderstood. "While there's increased awareness that solid benefits are a key factor in attracting and retaining good employees, companies are having a harder time delivering them," she says. "Because health care prices continue to rise, companies haven't made too many changes in their benefit offerings, but they have tended to shift more of the cost burden onto employees."
In addition to benefits, pay and recognition, workplace safety has vaulted to prominence as a critical element of job satisfaction. In an earlier SHRM workplace poll, taken right after the Sept. 11 attacks, only 36 percent of employees rated safety as a very important issue. In the current study, that number jumped to 62 percent - by far the largest increase of any category.
In the near term, retention may be a bigger issue in certain industries - such as defense contractors, oil and gas producers, or accounting - where demand for quality talent is at a premium. However, as the leading edge of baby boomers become eligible for retirement, experts believe that all business sectors will need to become more strategic about identifying, cultivating and keeping staff with vital skills.
"I think this means a lot more firms will be developing individual retention plans, which may include market pricing for unique or critical abilities," says Schramm, "And, as part of this change, human resources professionals will increasingly need to focus on ways to integrate retention into succession planning."
Are you in need of some tools to tune-up your retention efforts? Experts suggest the following tips:
Find out what your employees think. A well-crafted survey, administered by an outside provider to ensure confidentiality, can be well worth the investment to help a company pinpoint recurring issues that contribute to employee turnover or dissatisfaction. A more focused approach on this theme is to identify top performers and invite them to individual discussions on job satisfaction and career planning. In either scenario, follow-up is critical. Experts emphasize that opening the door for feedback, but choosing not to act on the information, can send messages that will hinder - not help - retention.
Set a clear - and consistent - tone from the top. In a 2005 SHRM Workplace Forecast, 92 percent of executives said employee alignment with business goals was important to overall success. However, many of those same leaders do not effectively communicate key business objectives or the nonfinancial elements that make the company distinctive. Savvy executives will bridge that gap by regularly updating workers about business performance, praising specific work units or individuals for important contributions, and reaffirming how the company lives its mission, vision and values. The effectiveness of this step can be measured in regular employee engagement surveys or in smaller focus groups held on an annual or semi-annual basis.
Strengthen the manager-employee relationship. Retention studies consistently show that the supervisor-employee relationship is one of the biggest factors in whether the worker chooses to stay or leave a job. However, managers are frequently evaluated on their technical or financial competencies - not on their ability to motivate and interact with staff. But that strength will become increasingly important as labor force dynamics continue to change.
"A lot of traditional human resources functions are now being pushed down into various work units, and that means mid-level leaders need to learn how to effectively handle staff-related issues," says Schramm. "We're now seeing a trend where companies are striving to improve how line managers work with people of different generations, or with different cultures. I think that's a strong signal that more businesses are recognizing how important that mid-level supervisor is in keeping quality employees onboard."
Consider flexible work arrangements. Nearly 60 percent of employees in the SHRM study said "work/life practices" - such as flextime, telecommuting and compressed workweeks - were very important to job satisfaction. However, only half of human resources professionals in that same study said their companies offered flextime, and only one-third had active telecommuting or compressed workweek options. While such choices may not work equally well in all business segments, experts warn that as the labor market becomes more competitive, many employees who feel strongly about balancing job and family commitments will leave firms that don't meet their needs.
Invest in a culture of learning. When times get tough, companies frequently pull back spending on conferences, seminars and learning opportunities to focus solely on day-to-day operations. However, that approach can stifle new ideas, creativity, and ultimately lead to worker burnout. A cost-effective way to handle this issue is to develop a strong internal corporate development program, where employees have individual learning plans that are tailored to company and personal needs. Herman, from the Workforce Stability Institute, says that approach avoids "stand-alone" learning in favor of development opportunities that help improve the company's bottom line.
By taking these steps, you will improve your company's ability to keep good workers when new opportunities arise.
Published: July 2005 RSM McGladrey's Advantage Electronic Newsletter.
For more information on the above topics, please contact Carolyn Scarborough at 256-533-1720 or email at cscarborough@beasonnalley.com. Coffee Talk
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