401(k) Administration (And Compliance) Overview


Careful 401(k) administration will help insure a successful 401(k) program. Improper administration can lead to a reduction in participation or mistakes resulting in penalties or the loss of the plan's favorable tax status. Though 401(k) arrangements should be designed to meet employer objectives, more complex program designs often yield administrative difficulties and superfluous costs.

Choosing the best firm to provide 401(k) administrative services will help produce a successful plan. If the employer selects a "bundled" service provider, he should be aware that since many such providers are primarily interested in the management of assets, they may lack expertise in administration and a consultant may be required to check that all administrative services are being properly provided. An administrative manual should delegate responsibility for each 401(k) administrative task.

Some aspects of 401(k) administration are continuous, while others must be performed annually:

I. Continuous administration. The 401(k) program must always comply with applicable regulations. The plan document must be current and a Summary Plan Description provided to participants. Any change in employer status (e.g., purchase of another company) must be analyzed to determine its effect on the plan. Participants must receive enrollment material, including beneficiary designation forms, when entering the 401(k) and other material when receiving distributions.

II. Annual administration can be divided into three areas:

1. Administrative aspects relating to funds entering the 401(k). This area relates to the determination of employer contributions, allocation and testing. Contributions must be consistent with employee data and the plan document. To accomplish this, employee data must first be reconciled, determinations must be made regarding participant status and employer contributions allocated. Contribution amounts are subject to many tests. These help insure that contributions do not discriminate in favor of "highly-compensated employees" or exceed tax deductible limits and "annual addition" limitations applicable to individual accounts and numerous other requirements. It is important to make sure that all tests are properly assigned since failure to perform even one may result in severe penalties or plan disqualification. Extreme care should be used with bundled service providers because they may not possess the necessary skills to perform these tests. Since the testing requirements are the most complex and costly aspects of 401(k) administration, caution should be taken in this regard. If the 401(k) is properly designed it may be possible to simplify the tests, or even eliminate some completely.

2. Administrative aspects relating to funds within the 401(k). This area relates to the determination of the account balances of the participants and related aspects. If investments are participant-directed, proper recordkeeping will produce the correct account balances. If investments are pooled, earnings must be allocated to the accounts, in proportion to their value, to produce the account balances. The vested account balances can then be determined by applying the appropriate vesting percentages.

3. Administrative aspects relating to funds distributed from the 401(k). This area describes withdrawals including loans, hardships and distributions upon termination of employment (or retirement, death or disability). Tedious paperwork is required when funds are released and forms must always be completed by the participant (and, in many cases, consented to by the spouse).

III.. Reporting and disclosing of all fund transactions. The employer must meet certain reporting and disclosure requirements regarding the government and plan participants. All participants should receive, annually, a Summary Annual Report reflecting the financial status of the plan and participant statements reflecting their account balances. The IRS must be provided with the series 5500 forms for the plan, annually. In addition to the annual requirements, participants must have the right to view other documents, such as the plan itself.

Further Assistance

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