Year-end compliance tasks are in full swing for employee benefit plans and most likely your company has a 401(k) plan. The administration of 401(k) plans for restaurants can be very tedious and it is easy to overlook or miss an annual deadline or test to be performed. Below is a list of common issues surrounding year-end compliance with your 401(k) plan to check off.
Financial statement audit
The annual audit of your Plan’s financial statements by an independent auditor for the year ending December 31 is due to the Internal Revenue Service (IRS) and Department of Labor (DOL) by July 31 along with Form 5500, unless you formally extended, which gives you until October 15 to file. If your plan is new or had a significant increase in eligible participants, you will need to determine whether a financial statement audit is required. Click here for more information on whether you need an audit of your 401(k) plan.
Plan Sponsor annual contributions
If your Plan allows for a discretionary contribution by the Plan Sponsor, it is important for you to make this contribution prior to the due date of your tax return to take the deduction for that tax year. For example, a Plan Sponsor with a tax return deadline of March 15 must contribute to the Plan by March 15. If the Plan Sponsor has formally extended its tax return deadline to September 15, the Plan Sponsor would have until the extended deadline to make the contribution.
Excess contributions by highly compensated employees (HCEs)
Because restaurants can have many eligible participants not participating or contributing a low amount when compared to HCEs, the contributions of the HCEs can be limited and kicked out of the plan due to failing certain discrimination testing. Should this occur, it is important for the Plan to refund these contributions to the HCEs as the HCEs will be taxed on these excess contributions in the year received by the HCE. HCEs are defined by the IRS as an individual who:
- Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
- For the preceding year, received compensation from the business of more than $120,000 (if the preceding year is 2015, 2016, 2017 or 2018 and $125,000 if the preceding year is 2019), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
Click here for more information on the annual IRS required compliance testing regarding highly compensated employees.
Utilizing participant forfeitures
It’s not uncommon to see participant forfeitures build up in a plan and not be fully utilized. It is common for Plans to allow participant forfeitures to be used for employer matching contributions or payment of administrative expenses. Some Plans require the forfeiture to be allocated to the active participants so be sure to abide by your Plan document. Click here for more information on the use of forfeitures in employee benefit plans.
Annual compliance requirements are an important fiduciary responsibility of the Plan Sponsor and can be easily messed up. Being aware and planning for these requirements will ensure a smooth year-end compliance for the Plan and minimize additional costs to you as the Plan Sponsor.
Dustin J. Minton, CPA