Offering a 401(k) plan to your employees is a smart move. It’s probably why such a large percentage of businesses, both large and small, offer this retirement savings option to their employees. Small business owners are only slightly less likely to offer a plan, and many of them even offer matching contributions for employees as well.
That said, many small business owners still feel they can’t offer a 401(k) plan to their employees. Some may be under the impression they must offer a match, while others may think they can’t afford a plan. In some cases, business owners skip the 401(k) because the plans can be quite complicated to administer.
The fact that the plans can be complex is probably what leads to some of the most common 401(k) mistakes. Small business owners should take note of these four mistakes, and then take steps to correct them.
1. You Don’t Follow Your Plan Document
Every 401(k) plan has a plan document. The plan document is designed to ensure compliance with ERISA. If you don’t follow your plan document, you could be non-compliant.
You may not even be intentionally breaking the law. Most small business owners end up accidentally violating ERISA by failing to follow their plan document to the letter. Something as simple as allowing an employee into the plan too soon could land you in hot water.
Be sure to take a look at the plan document any time you’re not sure of the rules or provisions. Following this document will help you stay on the right side of the law.
2. You Deposit Employee Contributions Late
The Department of Labor stipulates that all employee contributions should be deposited no later than the 15th business day of the subsequent month. If you deduct contributions in August, for example, these contributions should be deposited no later than September 15.
Many employers will wait to make these deposits, which is not considered good practice. The Department of Labor suggests you should actually make a habit out of depositing employee contributions as soon as you can reasonably segregate them from your business assets.
It’s a good idea to deposit employee contributions as soon as possible because then you know the money is where it needs to be. It also ensures you won’t incur any penalties.
3. You Forgot about the Compensation Limits
There are limits to how much you can use in calculating your compensation limits. This is usually more of a concern for high-earning employees, but if you have some C-level executives earning high salaries, you’ll need to be aware of these limits.
If you ignore the limits, you’ll incorrectly calculate the contributions an employee can make to the 401(k) in the year. This could lead to penalties later on.
4. You Didn’t Correct a Top-Heavy Plan
Key employees are often the highest earners in a 401(k) plan, which could lead to a situation where they hold most of the plan’s assets. This situation is known as a “top-heavy” plan. If your key employees hold more than 60 percent of the plan’s total assets, the plan is top-heavy.
You’ll need to correct this by making contributions on behalf of non-key personnel. This will help balance out the holdings so that all employees hold a fairer share of the plan.
This rule is very easy to overlook, but you should pay attention to it. The Department of Labor can choose to audit you, and top-heavy plans usually incur penalties.
These are just a few of the common mistakes small business owners make when it comes to managing their company 401(k) plans. Did you know your payroll provider could also help you administer your 401(k) plan to ensure compliance? Enquire today.