401k audit reminders and common errors for restaurants to avoid

Finance to Table Education for Operating Your Restaurant

In order to stay competitive in the restaurant industry, many companies offer 401(k)s to their employees as an incentive. Due to the nature of the industry, there are some important factors to consider in order to avoid errors or issues with the Department of Labor (DOL). Below are necessary considerations to help restaurants administer more effective 401k plans, as well as 401k audit reminders and common errors.

Definition of Compensation

Eligible and ineligible compensation for 401k purposes can be tricky for most plan sponsors in the restaurant industry. Eligible compensation is usually defined as W-2 wages which would include normal earnings, bonuses, all cash and non-cash tips that employees receive, as well as additional compensation types. One common error is the incorrect use of compensation for contribution purposes, specifically in regard to tips. It is important to check plan documents to fully understand what is defined as eligible compensation and to ensure that payroll codes are coded correctly.

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Treatment of Tips

Treatment of tips for tipped employees can be a major trap. For employees who elect to participate in the plan and take home most of their compensation in cash tips, this can be an issue. It is the plan sponsor’s responsibility to make sure that you collect that money from the employee and remit it timely (discussed below). If this money is not collected it will result in corrective actions to true up the employee’s missed contribution along with lost earnings. Many restaurants are beginning to pay tipped employees through paychecks instead of cash tips to help avoid this issue. It is important to pay attention to any employees who are participating in your plan that take home cash tips to avoid any errors.

Enrollment Eligibility/Auto Enroll

Enrollment eligibility requirements are defined by plan documents and need to be communicated to all employees upon hiring. The restaurant industry has some unique factors that make it different from other 401k plans and as such, there are ways to structure your plan to minimize issues and errors. Restaurants typically deal with high turnover, low wage, low participation and rehires. To combat high turnover, it is useful to implement higher eligibility requirements such as a year of service, 1,000 hours worked, and an age requirement of 18 or 21. To increase participation in the plan, after these requirements are met, you can elect to have employees automatically enrolled into the plan at a set percentage (generally 1-3%). Overall, it is important to make sure you are following the requirements listed in your plan document to avoid any issues.

Timely Submission of Contributions

The Department of Labor (DOL) requires that contributions be remitted to the plan as soon as administratively feasible. Failure to do so will result in corrective actions, such as funding lost earnings to all affected participants, as well as possible penalties from the DOL that you will be required to pay.

If you believe any issues exist or if you have any questions, it is important to consult your Third Party Administrator, and/or your Henry and Horne engagement team as soon as possible.

Heather Ball