Many employers are of the belief that if they hire an insurance company, bank or financial institution to administer their 401(k), pension, health and welfare (including group medical, dental and vision plans) or Section 125 (cafeteria) plans, they no longer have responsibility for the operation of those plans. That belief is WRONG. In the vast majority of instances, the employer retains the liability, and if they don’t pay attention to the requirements of the Employee Retirement Income Security Act (“ERISA”), the Internal Revenue Code and other laws governing employee benefit plans, they are subject to Department of Labor and IRS audits (which can result in substantial penalties and sanctions) and high-liability and costly lawsuits. The most common areas where careful attention is required include:
- All of these plans must be in writing, must be properly adopted (by Board resolution or otherwise) and must be updated to reflect recent changes in applicable law. 401(k) and other “qualified pension plans” must also have a current IRS determination letter. If your plan document has not been reviewed or revised in the past several years, it may be out of date, and you should also check to see if your IRS determination letter is still current.
- Plans covered by ERISA, which include 401(k), pension and health and welfare plans also require a “summary plan description.” Having only an insurance policy, certificate of coverage or booklet from the provider is not enough.
- Make sure the plan operations are in accordance with the plan document and summary plan description. The IRS reports that the failure to follow the terms of a plan is a common problem encountered on audit.
- Make sure you have timely deposited employee 401(k) deferrals. To do that, you need to determine the earliest date you can segregate deferrals from general employer assets and compare that date with the actual deposit dates and any plan document requirements.
- Understand roles and responsibilities. The agreement you sign with an insurance carrier, financial institution or any other person or entity that provides services for any of your benefit plans will define who is responsible for what. Make sure there is a written agreement, that it is current, that it is signed, and make sure you understand who is responsible for what. Misunderstandings can result in unanticipated liabilities or unexpected costs.
- Make sure to file the appropriate form in the IRS Form 5500 series and distribute a Summary Annual Report to all plan participants each year. If you believe you are exempt, be sure!
- 401(k) Plan investments. In the vast majority of cases, you have a fiduciary responsibility for the selection and monitoring of 401(k) plan investments-that they are prudent and in the best interests of plan participants. Merely selecting from a platform of mutual funds offered by a bank, insurance company or financial institution is not enough, and if you believe you have delegated the function to someone else, be certain!
Ronald Cooke is a recognized authority on the Employee Retirement Income Security Act (“ERISA”) and wrote a book entitled “ERISA Practice and Procedure”, published by Thomson/West. If you would like to contact Mr. Cooke he can be reached at (805)-716-3148 or email at ronjcooke@aol.com