Administering Your Own Plan: What Could Possibly Go Wrong?
As many people are aware, serving as the fiduciary or plan administrator for your company’s retirement plan can be a tricky business indeed. After all, most company executives have other bits of business to tend to besides making sure they fully understand their legal duties as their plan’s administrator.
We at Pentegra thought it would be illuminating to gather some “war stories” about situations where retirement plan clients got stuck in some very thick fiduciary mud. Solving those problems can of course be done – preferably by a professional team working in the field, one that offers fiduciary outsourcing and 3(16) administrative services.
An independent ERISA Section 3(16) fiduciary relieves an employer of nearly all fiduciary liabilities for their plan. Why is it important to use a 3(16) administrative fiduciary for your plan? Because of course, things don’t always go according to plan. For instance:
A recordkeeper paid out a death benefit as a matter of course. But the participant in question had divorced, remarried and changed his beneficiary to his new wife. However, the recordkeeper had processed the benefit based on an old form they had on file — and paid the benefit to the participant’s ex-wife.
If it sounds like an old sitcom plot, hold your laughter: The recordkeeper was sued by the participant’s new wife.
In another instance, a client didn’t file IRS Form 5500’s for three years because they thought their provider was doing it. (Form 5500, or Annual Return/Report of Employee Benefit Plan, is used to file an employee benefit plan’s annual information return with the Department of Labor. If a plan is subject to ERISA, a 5500 must be filed every year.) Furthermore, the client also was not following their loan provisions correctly.
This resulted in several fines, the hiring of an ERISA attorney, and the need to apply for a Voluntary Correction Program (VCP) to correct the mistakes. Provided your retirement plan is not currently under an IRS audit, if you have made mistakes with either the language in the plan document or how you’ve run the plan, you can apply for a VCP – for which you will pay a user fee. The IRS then reviews and approves your proposed correction methods for either the plan document or operational errors that, if not corrected, could result in the plan losing its tax-favored status.
In a third instance, another client was using his accountant for help with his profit-sharing-only plan. When he decided to look at other options for allocating his profit-sharing dollars, a Third Party Administrator (TPA) was brought in to review his plan and discovered that his plan document had not been restated since before the GUST restatement period.
(The name “GUST” is derived from the combination of: General Agreements on Tariffs and Trade (GATT), the Uniformed Services Employment Rights Act of 1994 (USERRA), the Small Business Job Protection Act of 1996 (SBA-96), and the Taxpayer Relief Act of 1997 (TRA-97). As a result of changes to tax law in the United States, employers and retirement plan sponsors are required to complete new Adoption Agreements and restate their prototype qualified plans. In order for plans to maintain their qualified status, they must meet different statutory regulations.)
Because of this oversight, the plan document had to be brought forward through required IRS document restatement periods — which cost the employer additional fees to both the IRS and the TPA to complete the work.
We have several other such stories, which we will share in a future post. But in the meantime: If you haven’t already, consider hiring a trusted TPA to take care of your plan’s administration. You can save time, money – and a lot of headaches.
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