On-Demand Webcast: In Your Corner--Common Missteps Befalling Benefit Plans
March 30, 2021
Our panelists discussed pitfalls to avoid regarding common errors found during a plan audit, as well as proven techniques for preparing and aligning your benefit program to company strategy.
Matthew Kerzner:Hi, good afternoon everyone. It's a pleasure to be with you all. My name is Matt Kerzner, and I'm the director in the Center for Individual and Organizational Performance with EisnerAmper. I am over three and a half years with the firm and I lead the strategic human resource group and I have over 25 years of human resource in organizational development. And now we'll move on to the presentation and I want to thank you all for taking the time out of your day to join Brenda and I.
Brenda DeSaro:So today, we're going to start with our objectives. Common missteps found in benefit plans. During this webinar, we'll discover different things that we've seen in Employee Benefit audits, various reasons that those errors occurred, and several ways that you can avoid them and ways to put procedures in place that will help to mitigate them from arising. So hopefully this will help you learn how to avoid them. Our opening thoughts. So let's be real, no plan is perfect, errors and non-compliance do occur.
The plan administrator is responsible for the plan's tax qualified status. If the plan loses its qualified status, then any of those contributions into the plan could become taxable and nobody wants that. Almost all of my plans that I have seen will utilize a third party service provider. They could be your fidelitys, vanguards, principles, ADP paychecks, you get the idea. The plan management is responsible for maintaining the compliance of the plan, and may have a third party provider processing many of the transactions and reports for their plan.
The plan fiduciaries can outsource this service, but you can never outsource the responsibility. So now on to auditor's responsibility. During an audit, an instance of non-compliance is discovered. It's our responsibility to assess how it has impacted the plan. Wanted to understand how did this non-compliance happen? Did it impact a lot of participants or just a few? How long has this error been occurring? And does the plan have ERISA council? Once these questions have been answered, then plan management can start to take the necessary steps in the correction process.
Matthew Kerzner:Oops. Thank you. So as you all might have learned from the previous webinar series, some of the fiduciary responsibilities, and they have already been covered. I do want to cover a few of some of the important fiduciary duties and responsibilities. First of all, I want to cover the exclusive benefit rule. One of the major fiduciary responsibilities is to operate the plan for the benefit of the plan participants and the beneficiaries. As a fiduciary, you also might benefit from being a participant in the plan. But your number one responsibility is for the current past and future participants of a 401k plan.
The second one is what's called the prudent man rule. In regards to ERISA 404(a)(1)(B), it is the fiduciary's responsibility to make sure that all proper information that's in the plan document, how it's administered through the individuals who can participate in the plan, all the investments that are part of the plan, it is the fiduciary's responsibility to make sure that this information gets over to the participants and this has to be done with care. You have to have the skills, the knowledge and the ability to make sure that you are doing all the right things for the participants in the plan.
It's extremely important that if you are the fiduciary, that you operate the plan according to the terms of the document, and you want to stay within those plan documents or you might be disqualifying the plan and be breach of your fiduciary responsibilities that you hold. I always say, when in doubt, pull out the plan document, read it over and make sure you fully understand the rules of the game. Another role and responsibility of being a fiduciary is making sure that you have a very diverse investments for you and your participants. In a later slide, we're going to be covering some of this information and some of the more detailed fiduciary responsibilities that you do have.
We're also going to talk a little bit about the investment committee and all the proper information that they could use to make the proper decisions for the 401(k) plan.
Brenda DeSaro:So now we're going to go through some common missteps. And to look at this slide, you see the steps leading up and one is broken. So we know that sometimes there can be some missteps. So I want to say, who was responsible for the plan? Is it plan management? The plan fiduciaries? Who needs to keep the plan in compliance? Matt, what have you seen in this area?
Matthew Kerzner:Yeah Brenda, thank you for bringing that up because as an HR professional, I had the responsibility of doing the payroll, and doing the input for the 401(k) to make sure that all of the money went into the 401(k) accounts. Now one of the issues is I get vacation time, I had to be away from the office. So the CFO was my backup to do payroll and to submit the 401(k). What happened was he had a lot of things going on at the time, he ended up doing the payroll so everybody got paid, but he did not submit the 401(k) contributions into the plan.
When I got back from vacation, obviously, I had a lot going on in my inbox. So I did not get to the 401(k) until after I did the second round of payroll. And I realized that I submitted the 401(k) with the current payroll, but I never did the past one. And this one, it became an issue and it was late. I submitted it late. So Brenda, that was a situation where I learned from that mistake and it actually put me out of compliance with the plan document.
Brenda DeSaro:Well, thank you Matt. That is actually a perfect example of how an untimely remittance could occur. And we're actually going to go into detail about that type of deficiency later in the presentation. Also, we're going to look to see what do you understand about your plan document and have the provisions of the plan been applied correctly? We'll take a look at the definition compensation. What does your plan document say about that and how is it defined? Next, what are the eligibility requirements that must be satisfied in order for someone to enter into your plan? Does your plan have any forfeitures? What does the plan document say about how to utilize those forfeitures?
Another item we'll touch upon is, were the participant's elections followed? This can be for someone who initially wants to join the plan and how their deferral request is handled, if they make any changes for their deferral during the year, and then with an employee has left the company and now is seeking a distribution, what are their elections? Here, timing is very important. Then my favorite is untimely participant deferrals and those happens a lot of times, it is discovered when they're reconciling payroll, and how timely is that done or when they're reconciling to their third party provider reports for the contributions that were received.
So we want to know what is your process for remitting employee deferrals. This includes the employee contributions, as well as any loan repayments that are being withheld from their paycheck.
Matthew Kerzner:Let's get into a little bit deeper of the role of a fiduciary and some additional missteps that could happen. I think it's important to first understand who is the fiduciary and who has that responsibility and what's expected of you. 401(k) plan document will spell out who the fiduciary is and what the roles that he or she must play in the major responsibilities that they have. It will be important to understand that all of your responsibilities, and we'll cover this at a later slide. It's important as a fiduciary, don't guess what's in the plan document.
You need to read through the plan, at least annually and anytime you are unsure about the provisions in the plan, pull it out. As an HR professional, I will tell you, I pulled out the plan all the time and I highlighted sections when employees or my investment committee, or my advisors called me and I had any questions that came up through that process. I found out over time that I had highlighted a lot of areas and I made note in the plan document. I would visit this frequently with my investment committee, and with the third party advisors to better understand all the areas of the plan that I was confused about.
It made me a better fiduciary, it made me a better HR professional and it helped me with the investment committee to know what direction we needed to go based on the questions and comments that my participants had. The last important item on the slide is a plan sponsor can outsource certain things, but they can never outsource the responsibility of the plan. And it's very important that you follow the plan document to the letter from the law. So what is a fiduciary? And we've covered this, we're going to get into it a lot more deeper into this presentation, you've already gone through one of the webinars and we got into what a fiduciary is, but I think I'm going to just read this slide so it sinks into you.
What is a fiduciary? If a fiduciary is a person or the entity, it could be the committee, it could be the board that acts on behalf of another person or persons, putting their clients or employees ahead of their own with the duty to preserve good faith and trust. Being a fiduciary requires both legally and ethically acting in the best interest of others. In regards to employee benefit plans, if fiduciaries may be responsible for the general well-being of the fairness, the money assets, the financial advisor's responsibilities, making sure that the board and the leadership of the organization is working ethically to make sure that what is being invested is being done properly.
A fiduciary is a person that acts on the behalf of others. Now you could be a participant in the plan, but if you have that fiduciary responsibility, you need to look out for the best interest of all the employees, both current, past and future who are going to be investing in the plan. So there are some key responsibilities that I think is really important when you are a fiduciary overseeing a 401(k) plan. The first one is the duty of care. This applies to the way that the fiduciary makes decisions that affects the future of the business.
The fiduciary and the leadership person that has the duty of fiduciary responsibilities must make the right possible decisions that will impact the business and the employees. The second one is the duty to act in good faith. Even after its responsibility investigates all the options before it, the fiduciary has the responsibility to choose the option he or she believes best serves the interests of the business, its shareholders and its employees. The third one is the duty of loyalty.
This means that the fiduciary is required to put on no other causes, interests or affiliations above the allegiance to the company and the company's investors. Fiduciaries, board members, executives must refrain from personal and professional dealings that might put their own self-interests that of another person or persons above the interest of the company and the employees that they are supporting. As a fiduciary, you should and need to follow the guidelines that could reduce the risk of failing to perform these three duties. In order to cover all three of these areas, you need to get educated and organized and organize your committee and the importance of fiduciary training for all.
It will be important that everyone that is going to oversee this 401(k) plan get some type of training to understand the roles and responsibilities. It will be important to develop an investment strategy, an investment policy, that will be the rules of what I call the game of doing the 401(k) and how the investment committee will work, how they will document their decisions, and how they want to move forward with the plan. As part of the key responsibilities, and putting the investment committee together, you want to determine how many meetings, how often you're going to get together, how you're going to document your notes, and how you are going to be communicating your decisions for the best interest of your employees.
The last key piece is how you're going to monitor and hold yourself accountable. Regarding your fiduciary responsibilities, and managing that investment committee, holding yourself accountable is going to be very critical. So at this point.
Matthew Kerzner:So at this point, I want to talk a little bit about fiduciary considerations and about investments. There are four areas that I want to talk about here. The first one is an investment committee and having fiduciary responsibilities, you want to make sure that you have an investment committee which is a group of executives, board members or leaders of the organization who are identified as fiduciaries. This is a group that gets together several times a year to review the plan document, the 401(k) investments, get an update from the advisors who are supporting your plan in making the decisions for the 401(k) plan document.
This group will also identify if there will be a change in advisors, how often employees need to be trained and to make sure that all legal documents that are required get to the plan participants. Those who are active, those who are no longer employed, but have their money invested in the plan. The second thing that is very important is what's called the investment policy. The investment policy is a specific document that really has the rules of the game, and how the investment committee will hold themselves responsible in all the duties that they need in order to manage the 401(k) process.
This document will also state how often the investment committee will meet, how they will document their notes, where this information will be stored, and how the meetings will take place and how they will be recorded. Very important that this investment policy is utilized and reviewed by the investment committee frequently. The third consideration is the 401(k) advisors. The advisors are any third party group that helps manage the 401(k), does the testing to make sure that you are all being compliant with the plan. And also, they might be the ones that help audit the 401(k) to make sure that you are being compliant.
The last thing that I would like to talk a little bit about is benchmarking and the importance of benchmarking. Benchmarking is not only to have a good understanding of how he plan is working in regards to your investments, how many people are using the plan, but also could be used to look at your vendors, your fees, and any future possible investments and how often your investment committee and fiduciaries are educating themselves in the plan participants. Brenda, do you have any thoughts on this?
Brenda DeSaro:Yeah, thank you Matt. One of the things I was thinking about with benchmarking is I've seen some plans utilize the SOC 1 report, Type 2 from their service providers. In that report, it will give if there was any findings or any issues that were discovered, and provides a valuable resource to the plan management in taking a look at how those service providers are doing.
Brenda DeSaro:So now we're going to jump into the responsibility of a plan sponsor versus a service provider and we've got the two columns laid out. I wanted to start with the plan sponsor and as we've spoken about earlier, the plan sponsor is applying the plan provisions in the everyday use of the plan. That's how they're operating the plan. And if the plan has an investment policy, the plan sponsor is going to make sure that those actual investments offer to the participants are in line with what the investment policy is stating.
Also, the plan sponsor is authorizing transactions. Many times, some of these transactions may be pre-authorized with the service providers such as distributions or others may not. When I think of contributions that are being remitted to your service provider from the plan sponsor, there should be an internal process in place that will reconcile the amount of the proper payroll report or funding support and then approve that amount internally. And next, verify the proper allocation is hitting the proper participant's accounts when it's sent over to their vendor.
The plan sponsor makes sure that the reports and documents that are being utilized for the plan are reviewed and correct. At times, payroll may have several runs and you need to make sure that the final correct run is what is being processed and sent over to your 401(k) provider. Just remember, just because a report comes from the service provider doesn't mean that it's correct. Those reports are going to be generated by the information that is sent over and they'll need to be reviewed. Some examples of reports that you'll get from your service provider would be your distribution reports, those remittance reports, your trust statements, et cetera.
If the information provided to the service provider was incorrect, then the reports are going to be as well. Now we can move into internal controls and their related process which are very important surrounding your plan. The controls are put in place to help deter, detect and prevent circumstances that could harm the plan. Ideally, these controls should be documented. I've seen where a really good documentation of the controls is very beneficial and when you have a new employee come into your plan management that is working with the 401(k), having those controls documented in the processes makes their transition to learn about the plan or the flow of the documents much smoother.
The plan sponsor should be reviewing the SOC 1 Type 2 report of their service providers. There may be more than one provider that you utilize for your 401(k). I've seen where there is a fidelity and then they use a payroll provider like EDP or paychecks and all of those vendors are going to have SOC reports and some of them are actually going to have multiple SOC reports. So the best thing to do is to talk with your representative at the provider, understand what platform you're using, and then know what SOC reports you need to get that are applicable to your plan. Also in the SOC report, you're going to see that there are complimentary user controls that need to be reviewed and documented that you as the user, the plan sponsor have those controls being implemented.
I've seen some of those controls being that you have a username in order to access their website and a password in order to keep it secure, or that once you get the reports from your service provider, you're reviewing them to make sure that they are accurate. Lastly, we're going to evaluate the service providers. Best practice I've seen is that you should assess your service providers periodically and document how those professional relationships are going. It's good to have support for why the providers of your plan and that it's utilizing are the right fit for your plan. So now we're going to move over to the other column where we have the service providers.
They are the ones that are going to set up the plan on their record keeping or trust systems using the plan provisions abound in your plan document. And if they have investment options that come from the direction of the plan sponsor as well, you're going to be telling your service provider what investments options to give to the participants. Now if your plan has an investment policy statement, that would make it even easier for setting up those investment options to make sure they fall in line with the policy. There are many transactions that get processed on your service provider's system for your plan.
The service provider receives the data and then processes this information. The data can come from your plan sponsor, like we said when you're remitting a contribution, or it can come from the actual participants like when a participant is seeking a distribution, or if the participant wants to change their deferral percentage for their contribution rate or if they want to get a loan. These requests may be coming through on the website of your service provider. The service provider utilizes the information that's been provided to them and maintains those transactions at the plan level, as well as the participant level.
The participant statement is a perfect example of those transactions all coming together and summarizes the activity of the plan for a specific time period and for that participant that we were talking about. The service provider has internal controls and many of those internal controls will be communicated and if it's a Type 2, test it on the SOC report. Now we're going to move into our definition of compensation. You want to know is the correct definition of compensation being utilized? This is very popular area for 401(k) plans. This definition can create a domino effect of errors in a plan and I can give you an example of how that error may play out.
So let's say that the definition of compensation for an employee and the employer contribution is calculated using a standard language that I see which is wages defined in Code Section 3401(a) and all other payments of compensation in an eligible employee by the employer for services to the employer while employed. So it's your wages. The employee in our example makes 100,000 of wages as defined by the plan and included in that 100,000 they received a $10,000 bonus which was called COVID and because they came into the office.
Eligible 401(k) wages in this example would be the 100,000. The participant elects 6% to be withheld for their 401(k) and the COVID bonus was new in 2020. I would say that the payroll department when they created this new compensation earning did not look at their plan document and said, "Oh this wouldn't be eligible." And that's how they coded it. However in our definition of compensation, it did not exclude bonuses and so now, we have a situation of an operational defect.
The application of definition of compensation does not agree with what the plan document says. So what payroll is doing is not what the document says. So here how the numbers play out is the deferral for 2020 would be calculated as 5,400 in the payroll system which is taking the 90,000 of wages times the 6% deferral rate. Here, the COVID bonus was incorrectly excluded. The correct 401(k) deferral should have been the 6,000 which would have been the 100,000 times the 6%. So the employee didn't have $600 come out for 401(k) when they should have, so there's your first domino.
The next one that falls is if this plan has employer match. The match is defined as 50% of eligible deferrals up to $5,000. The match calculation for 2020 would be $2,700 half of the 5,400 but it should have been 3,000. That person should have gotten 6,000 of a deferral and then 50% of that would have been $3,000. Then another domino that could fall is for the non-discrimination testing that that information of employee contributions, as well as employer is getting sent over to do the testing and then those testing results are incorrect due to that data that was supplied. Now in this example, if we were doing the audit and we found that there was this error, we would go to plan management and present the findings and recommend that they evaluate what we found and speak with an ERISA attorney.
You can see how getting the definition of compensation correct is so important and how it can very quickly create a domino effect of errors. Other areas in definition of compensation are to understand the plan provisions such as do you use a full year of participation to calculate it or is it just from when the participant enters the plan? Is the definition the same for the deferrals as well as for employer contributions? There's been instances where I've seen these two different, that there's a definition for the employee deferrals and then a different definition for the employer contribution. Another item could be is there a provision that the participant needs to be employed on that last day of the plan year in order to get the employer contribution?
So moving along, here's some other instances of definition of compensation. As the previous example that I talked about brought to light, it's important to know what compensation earnings are 401(k) eligible in the payroll system and which should be excluded. We saw in the example how the COVID bonus was excluded in the payroll system and it shouldn't have been according to what the plan document said. Some examples of earning types that could have been includable or excludable that I've seen are bonuses, vacation pay, overtime, compensation, you get the point.
A best practice that some of my clients use is to actually take your plan document with all of the specific provisions on what's includable wages versus excludable, and then align that up against your payroll codes. So in one column, you'll have the payroll codes. And then right next to it, you'll have your plan document with the page number and section from where those provisions line up with the payroll code. Anytime there's a new payroll code created or an old code activated, my clients will take the listing and then edit appropriately.
If errors occur, it is always advised with the plan sponsor speaks with ERISA Council for the best approach. Now we're going to look at another misstep. So the plan's eligibility provisions. The best thing would be is to read the plan document, understand when an employee can enter the plan. Your plan document may state that there is no age requirement or service requirement. So in that example, you would think that employees are able to enter the plan immediately, that's the plan right from that. But I would say caution, be careful.
The other element you need to look at in your plan is your plan entry date. That could be immediately. So if someone was hired today, March 30th, they'd be able to get in the plan today or it could be the first of the month. So if you're hired today and you want to be in the plan, you could be able to join on April 1st, this coming Thursday and that would be the first of the month, or others might be first of the quarter. So understanding what your plan entry date is very important.
In our fact pattern with no age and no service requirement, the entry date is so very important. The other thing is to make sure that people are able to get into the plan when they're eligible to do so. So let's move on to the next slide. So the plan document has what we want to know and we see that there could be different eligibility provisions for deferrals versus your employer contributions. The employee may be able to enter to defer upon immediately, but in order to receive the employer contributions, they need six months of service first.
Another thing is who should be excluded from the plan and are they in that group? I've seen part-time or subcontractors or different divisions might be excluded. The flip side of that is if you were to allow someone who couldn't be in the plan into the plan, that's a problem. Also, for those not participating in the plan, you want to understand when they were given the option to come into the plan. You want to know how and when employees are notified. They can participate in the plan. Is it during the onboarding process, or orientation? Or does your service providers send them a packet? Does your plan have automatic enrollment or auto-escalations? These two come into play for eligibility.
Matthew Kerzner:Great. So I want to talk a little bit about improper use of forfeitures or lack thereof. When participants work who is fully not vested in the employer contribution portion of the account, and they leave their plan and their unvested account balances is considered what we call a forfeiture. With this said, this money can only be used for certain things that are very spelled out in the plan document. It will be very important that the fiduciary follows the plan document to make sure there will be no issues.
I just want to explain a little bit about the vesting process. If you are in the plan and your plan spells out that you need to be five years with the company to be 100% vested and there's a company match, let's say 50 cents of the dollar up to 6% and it takes five years to be 100% fully vested. If you leave the company, we'll say in year three, the money that the company put in for the company match is now considered that forfeiture. Now that forfeiture can only be used generally for the following reasons and it's very important that you check with your plan document because I'm just giving you generality here.
Your plan document will spell out exactly what the money can be used for, but it could be to reduce the future employee contributions, that forfeiture could pay for plan administrative expenses, or that forfeiture could be allocated to the participants in their 401(k) accounts if they are eligible. As I stated, it is very critical that the forfeitures do not stay in the account like a bank account. And Brenda, I'm sure you've seen this, but can you comment a little bit about the forfeitures?
Brenda DeSaro:Sure, thanks Matt. So in my experience, we normally like to see the forfeiture balance of the plan that it goes to zero sometime during the plan year. The internal revenue code, revenue ruling 80-155 supports this practice. This is an item that I have recommend on occasion to some of my clients during an audit. But also remember that the employee deferrals are always 100%. Vesting is only for the employer contributions, and the non-visit portion is what gets forfeited when they leave.
Matthew Kerzner:Thank you.
Brenda DeSaro:You're welcome. So now we're going to touch upon distributions. Has the appropriate participant received the correct amount in a timely fashion? Could your plan have trailing deferrals or earnings? I've seen this. During an audit when we're testing distribution, we've seen where a participant requested that their entire account balance get funded to them. And yet, when we look at that participant statement at the end of the year, there's this teeny-tiny small amount still in their account. So why didn't it go to zero?
Well, many times what happens is the participant elects for the full distribution, the record keeper or service provider sends that money out and the account does go to zero. But then after the fact, these trailing deferrals or earnings that go into the participant's account, and now they have that small balance. The plan sponsor should be reviewing the account balances at the end of the year for instances like this. Another thing you want to look at is, was the distribution timely? How quickly from when the participant initiated the request for the distribution did they actually receive that requested amount?
And I've seen where this can be a few days, less than a week, and sometimes even the same day. This function can be outsourced to the service provider, but the responsibility can never be outsourced. Another thing to look at for distributions is the vesting. Is it correct? What does your plan document say? I know we probably sound like a broken record that we keep saying the plan document that really, that's the source and the answer to a lot of your questions regarding your plan. Remember that vesting is only for the employer contributions.
Another item to look at with distributions is if your plan allows for a hardship or an in-service withdraw, and if they do, is the participant able to meet the criteria in order to get those distributions? Matt, have you ever experienced an instance where someone was not able to start the distribution process?
Matthew Kerzner:Yes Brenda I have. And I'll quickly just talk a little bit about having your beneficiary forms filled out properly, and who's storing them and holding that a very bad experience where I had an employee that was vested in the plan at a very healthy 401(k) balance, but they had an untimely passing, they passed. And they did not fill out the beneficiary form, nor did we have it on record and their significant other who reached out to the company to start doing all the paperwork for processing all the right life insurance and the 401(k) balances and et cetera, the fact that we didn't have a beneficiary form on file, we could not start the process of transitioning that 401(k) balance over to that person.
Brenda DeSaro:Wow, thank you for that example Matt, that was a really great point. Now we're going to talk about the failure to comply with the participant elections. The participant's wishes are very important. And many areas of our plan are implemented because of the participant's election. Those could be like the employee contribution, their deferral percentage or if they selected a fixed dollar amount, where they want their contributions to be invested in, and how about when they reach a statutory limit in say last year so payroll turned off that deferral because they met the limit, but then you need to make sure that the very next year, that deferral starts up again because now they are in a new plan year.
Another election to look for is if the participant wishes to have a loan, and that those loan payments if they're coming through payroll that they are being deducted. When a participant election is not followed, that could equal errors. And if that happens, then one of the best thing to do would be to talk to an ERISA attorney.
Brenda DeSaro:Thank you Lexi. Wow, 64%. I imagine that to be the case, unfortunately, we've seen these, but rest assured there are ways to correct them and move forward. So untimely participant remittances. The DOL rule as shown in Section CFR 2510.3-102 states that the amounts paid by a plan participant or withheld by an employer from a participants wages for contributions to a plan, our plan assets on the earliest date that they can reasonably be segregated from the employer's assets. But in no event shall the date occur later than the 15th business day or the following month in which the amounts are contributed by the employee or withheld from their wages. This is not a safe harbor.
So I wanted to say that a lot of times, the plan sponsor needs done to understand that they need to remit it as soon as reasonable and that earliest date that it can be segregated from the company's assets. And honestly, I wish that the code stopped at that point because that is the most important part of how quickly they need to get it into the plan. Unfortunately, it doesn't. It continues with but in no event shall it occur later than the 15th business day. And the plan sponsor needs to know that those deferrals and also the loan repayments need to be sent over as soon as it's determined it's reasonable and can be segregated from the assets.
I've actually heard some DOL agents say that they look to see how quickly the taxes are segregated from payroll or what's the earliest that the plan has remitted the employee withholdings to the service provider in the past. Therefore, plan management should evaluate how quickly they can segregate those withholdings and then I recommend documenting why that is the policy, then stick to it, don't deviate. On this slide, we see that there's small plans as well as large plans.
So large plans, the DOL views that if you can deposit payroll taxes immediately, you can also do the same for your deferrals and loans. Large companies are deemed to be more sophisticated, have more resources and complete that transaction sooner than the seven days that is said for small plans. If there's a deposit that is deemed untimely because these things do happen, that's called a prohibited transaction and lost earnings must be deposited into the plan and allocate it to the impacted participants. Normally a form 5330 would also be remitted.
However, we saw that this year, rather we saw that the EBSA issued Relief Notice 2020-01 and this relief guidance was provided for instances of untimely remittance occurring between March 1st 2020 until 60 days after the announcement of the end of the COVID-19 national emergency or such other date announced by the DOL in a future notice. Therefore, we're actually still under this relief. Under the relief, the DOL will not take action if the failure to admit is solely attributed to the COVID-19 outbreak.
If your plan had an instance of untimely remittance during this time period and it is solely attributable to the COVID-19 situation, then we recommend documenting what happened and why it is a COVID-19 event. However, the untimely remains will still need to be represented on the schedule of delinquent contributions in the plan's financial statements and shown on the form 5500. So errors matter, nobody wants errors to happen, but when they do, they can actually provide some valuable information. We have discussed that non-compliance with the plan document is an operational defect and could cause planned disqualification.
Even small errors need to be addressed. You need to carefully assess what was happening at the participant level. Evaluate how the error happened, how many participants were impacted and for how many years? Talk with an ERISA attorney about how to make the participants whole and that would also include lost earning calculations.
Matthew Kerzner:Okay, thank you Brenda. So what I'd like to do is just briefly talk about some root causes of operational failures and the first one is we covered a lot already today and yes, Brenda and I did speak. I sound like a broken record about understanding the importance of the investment committee or the investment policy following the rules of the plan and it's really important that you need to make sure that you fully understand the plan's provisions.
Another one could be lack of oversight, both internally and externally. Internally is who is eligible to be in the plan, are they in the plan, do they have the right documentation. I already mentioned about the beneficiary forms being filled out, those are very important and as a fiduciary you do have that oversight to make sure that those things are in place. Another one would be some external and this is really managing your vendors looking at the fees that you pay, are you maximizing your plan's assets the best you can or are you paying too much money in fees or have poor investments where your participants are suffering because of it?
So having that lack of oversight could be one of those operational failures. Another one is the dramatic shift in the number of individual design plans, not being different or diligent in completing the adoption agreement or not referring to them when you're unsure. Always go back to your plan document to fully understand how your plan is being used. Another operational failure is having turnover and turnover is not what I'm talking about with your employees, but actually your plan sponsor. If you change plan sponsors, are you going over all the proper things that you need to, or did the transition from one plan sponsor to another happened seamlessly?
And this could be a problem if you don't do your due diligence as a fiduciary to make sure there's a smooth transition. Also, the service provider. Are they giving you everything that they say they're going to? Do you hold them accountable that they are going to get together with you several times a year to review your plan document, meet with the investment committee, review your investments, making sure all your paperwork and your documentation is in order. So having turnover with plan sponsors and service providers can be a huge problem if you don't manage those properly.
Also, consulting your ERISA attorney or hiring a quality auditor or a third party vendor to help you if you don't really do your due diligence and use your advisors, you could have operational failures as being a fiduciary with your plan. And then the last one is ineffective internal controls or no internal controls at all. And this is who is your backup? Who's watching what you're doing? How do you make sure that you are timely with your 401(k) processing? How often are you getting your committees together? What decisions do you need to make? These are all ways that you can get in trouble if you don't stay on top of them.
Brenda DeSaro:Thanks Matt. So now let's summarize some best practice. Read your plan document at least annually and when you're unsure, refer back to it, don't guess. Employee contributions, deposit each pay period, document your policy and then stick to it. When hiring a service provider, make sure that they are qualified. Check their financial condition, what experience they have with retirement plans of similar size or how many employee benefit plans do they work with? Document the hiring process and due diligence.
Ideally, those charged with governance, your committee and hold regular meetings. Minutes should be kept for all meetings and if we haven't said enough, document, document, document. So I think we're just about out of time. Matt, we'll move on to the next slide.
Matthew Kerzner:Yeah, perfect. Thank you. So a couple things. One, best practices to avoid those missteps. Get trained, it's the easiest way to do this. So there are four areas that I recommend when you're looking for a training program and there are many of them out there and they're all online. So one, understand ERISA's vision of your fiduciary responsibilities. Another area to get trained on is selecting and monitoring your service providers.
You can learn how to also learn what are the rules of the game, communicating to your participants, how often, what documents are needed when you're making investment changes, all of that needs to be communicated to your participants. Those who are currently working for the company and those who still have their money vested even after they leave. And then the last one is how does ERISA work and how do you make decisions being the fiduciary of that plan? These are best practices that you can follow that's going to help you avoid some of these missteps.
So with that said, here's some closing thoughts. Noncompliance does happen, but plan, learn from your mistakes. Make sure that you don't do them again. Don't go at it alone. There are qualified professionals that can help you and the last one is the ongoing approach is be proactive than reactive. Pull out that document, learn what it is, meet with that investment committee. Make sure that you are utilizing your advisors. They are there to help you make the best possible choices. Brenda, any final thoughts from you?
Brenda DeSaro: just like to close with knowledge is power and hopefully from this webinar, we've given you some things to think about.
Matthew Kerzner:And actually, the way I'm going to close this up and I apologize because we jumped ahead here is we have a quote here from Maya Angelou, "Do the best you can until you know better, then when you know better, do better."