It is that time of year again, 401(k) Plan audits are just around the corner. Although this can be a stressful time of year, there are things that you can do to help your Restaurant 401(k) compliance audit and your plan run smoother. The items noted below are particularly important for restaurants for a number of reasons. In most cases, these plans are made up of management and hourly staff which could cause issues with the non-discrimination testing. Additionally, because the participation rate in restaurants 401(k) plans is typically low, spending time making sure they are operating correctly may not be the top priority of management. By checking the below common issues in advance, you can save yourself time, money and frustration.
Problems with Non-discrimination Testing – On an annual basis, a 401(k) plan is required to perform the non-discrimination testing, these tests help to ensure that highly compensated employees (HCE) are not allowed to contribute significantly more than the non-highly compensated employees (NHCE). The two main tests used are Average Deferral Percentage (ADP) and Annual Contribution Percentage (ACP). These tests are normally performed by the plan’s Third-Party Administrator (TPA). However, you are responsible for ensuring that the TPA has accurate information for proper testing. To reduce errors the plan sponsor should appoint an individual to review employee data to ensure all necessary information has been correctly captured and remitted to the TPA.
If your plan fails any of the tests, it is not the end of the world. Things like this happen, the most important thing is to correct these issues as soon as reasonably possible. For example, you may need to refund HCEs contributions to bring your plan into Restaurant 401(k) compliance or make qualified nonelective employer contributions to all NHCEs. You should work with your TPA or other advisors to decide the best course of action.
Participant Contributions – For employee deferrals regulators say that deposits of employee funds should be remitted to the plan no later than the 15th business day of the following month. However, these deferrals should be remitted on the earliest date on which such amounts can reasonably be segregated from the employer’s general assets.
It is a common mistake for employers to remit these funds late, which can lead to plan disqualification and a loss of tax-exempt status. These delays may also constitute a prohibited transaction, due to these late deferrals being considered an interest free loan from the employees to the employer. To resolve this issue, you should consult with your TPA or other advisors, generally you will be required to fund lost earnings (interest that would have been earned if the funds had been remitted timely to the participants accounts). The best way to avoid these problems is to have procedures in place that ensure these funds are remitted timely.
Use of Forfeitures – Forfeitures are plan assets derived from the non-vested portion of employer contributions that become “forfeited” when the participant is terminated and not fully vested. According to the Internal Revenue Code (IRC) it is not permissible to allow these funds to accumulate over several years. If this happens it could affect the tax-exempt status of the plan. It is essential for these funds to be used or allocated to participant’s accounts in the plan year they are incurred. These funds are restricted in what they can be used for. The plan sponsor should review the plan document to ensure proper use of these funds. Generally, forfeitures can be used to reduce employer contributions and pay plan expenses.
By reviewing these common errors and being proactive in resolving these issues you can eliminate many of the headaches that can come with these errors. The IRS and the DOL understand that these mistakes happen, however, it is your responsibility to ensure that Restaurant 401(k) compliance issues are corrected as soon as reasonably possible. If you need any help with any of these items, please reach out to one of our restaurant professionals.
Travis McGee, CPA