Many restaurant companies offer, or plan to offer, a 401(k) option to employees as a retention tool and as a way to remain a competitive employer in the industry. Administering your 401(k) plan can be quite tedious and allows many opportunities to make inadvertent errors which can create havoc with the Department of Labor (DOL) and your employees. Many of these errors can be alleviated by having a firm grasp of your plan document and following it to achieve compliance.
Below is a listing of common 401(k) administration errors found during audits of 401(k) plans specific to the restaurant industry.
Definition of eligible compensation
You might think eligible compensation is what your employees are paid, and it could be, but you must look to your plan document to see how eligible compensation is defined. The plan document may say that it is W-2 wages, which would include normal earnings, auto allowances, bonuses, gift cards given or tips received – amongst other types of compensation. The common error is calculating the employee contribution to a 401(k) plan on the wrong eligible compensation. For example, employees cannot opt out on certain types of compensation like bonuses if the definition of eligible compensation includes it. If this error happens, corrective actions are needed by you to true up the employee contribution plus any lost earnings.
It is common for tipped employees to receive zero paychecks as any wages that would be paid in a paycheck are used to pay employee income taxes, leaving nothing to pay the employee. If this employee has elected to participate in the 401(k) plan, it is your responsibility as the plan sponsor to make the employees’ elected contribution on eligible compensation. Don’t make the error of not making this contribution… you now have the task of collecting this contribution from the tipped employee. If this error happens, corrective actions are need by you to true up the employee contribution plus any lost earnings. Many companies are moving towards not paying tips out in cash; instead tips are paid out in a paycheck which helps remedy this problem greatly.
Timely contribution remittances
The DOL has come down hard on plan sponsors to make timely contributions to the plan once the funds can be adequately segregated from payroll. In today’s world of automation, this can usually be done quickly… no more than two to three days. If this is your norm to segregate funds and submit to the plan, this timeframe becomes your deadline for all contributions to be made. Any variation from this timeframe could constitute untimely contributions resulting in true ups for lost earnings for each employee and penalties by the DOL to be incurred by you, the plan sponsor.
Your plan document also lays out who is eligible and when eligibility takes place. It is important to educate and notify your employees about who is eligible and when they can begin to participate. Don’t make the error of enrolling an employee prior to their eligibility date or enrolling an employee that is not allowed to participate in the plan. Should this error occur, the employee’s contributions would need to be returned to the employee as taxable wages.
It is sometimes assumed by the plan sponsor that hourly workers, specifically tipped employees, will not want to participate in the 401(k) plan as an eligible participant and decide to not offer any education on the plan. It is important to let the employees decide whether to participate or not. It is best practice to make sure all eligible participants attend internal education sessions at least once a year to better understand the 401(k) plan, its benefits and be given the opportunity for questions to be asked. This also mitigates fiduciary risks to you.
Many companies that start a 401(k) plan don’t realize an audit may be needed even if only a handful of employees are participating. An audit is needed when a certain number of eligible employees exist, not when the specified number of participating employees exist. For a restaurant company that allows all employees to participate, this can be easily overlooked as it may only be home office employees and a handful of restaurant level employees participating, so you may think an audit is not needed. Most likely if all employees are eligible to participate, you will have triggered the need for an audit For more information on when an audit is needed, click here.
As you can see, there are many opportunities for 401(k) administration errors to occur. It is important for you not to underestimate the complexities of a 401(k) plan and discuss these issues with your third-party administrator, attorney or your Henry+Horne professional prior to implementing your plan – or now if these issues exist for you – to avoid major compliance issues.
Dustin J. Minton, CPA