Rise in 401(k) errors found

August 10, 2008|By Janet Kidd Stewart

Among all the retirement savings concerns out there, how a company is handling its 401(k) accounts should be the least of employees' worries.

But it's potentially a real problem, experts say.

It's unclear how many companies are operating retirement plans that are not in compliance with Labor Department and Internal Revenue Service rules, but enough of them are cropping up in audits and voluntary compliance programs that the IRS is issuing new instruction manuals and talking to employers about these common mistakes.

IRS investigators are finding compliance problems at about 65 percent of the companies they have audited over the past year, a substantial increase from past years, said Monika Templeman, director of employee plans examination.

New guides for company and self-employed plans are available at www.irs.gov/retirement/index.html.

Typically, mistakes are being made at midsize to smaller companies that don't have the personnel or financial resources to keep up with tax code and law changes, IRS officials said.

Some of the mistakes are building even faster than the IRS can keep up with: Its new Fix-It Guide for employers doesn't discuss common mistakes made in 401(k) plan loan practices, for example. As loans become more common with the economy struggling, IRS officials say they are seeing more mistakes with these loans, and they are updating the guides to include them.

"Plan-loan mistakes are very prevalent and very problematic," Templeman said.

She said loans aren't being repaid on the right schedule, employees may be taking out more money than allowed or multiple loans that aren't sanctioned by the plan, or employers may be permitting loans without realizing their plan documents don't allow for them.

In other situations, said George Brim, an IRS group manager who deals with employee retirement plans, companies have processed loan requests over a Web site without properly signed documents or spousal consent. Such consent is typically required in money purchase plans but not 401(k) plans.

Technically, if one employee defaults on a loan, it could throw the entire company plan into default, meaning it could lose its tax-deferred status and individual account holders would have to pay tax on their holdings and would be forbidden to roll the funds into other tax-favored plans, such as individual retirement accounts, officials said.

Those situations are rare because there are several warnings and remedies that usually alert employers to bring their plans into compliance. But those remedies often involve fines and costly improvements to record-keeping, and not all small employers are able to keep up.

What can you do to make sure your retirement accounts at work are safe?

For starters, make sure your own account is in good order.

If you decide to take a loan or hardship withdrawal from your plan, read the summary plan description and any annual updates. These documents lay out all the plan's rules that cover loan repayment requirements and qualifications for hardship withdrawals.

Although there are some basic restrictions required by law, plans have fairly wide flexibility to institute their own rules, so don't assume the same rules apply at all employers.

Also, don't wait until the evening of the April tax-filing deadline to look at your workplace earnings statement, said Thomas Schendt, a partner with Alston & Bird LLP in Washington. The IRS tapped Schendt as a speaker for one of its Webcast discussions on plan mistakes ( www.taxtalktoday.tv/).

Many 401(k) mistakes, such as a company payroll system that allows too much in contributions during a year, aren't considered mistakes if corrected by the filing deadline, meaning no penalties apply, he said.

Keep a watchful eye out if you work for a company that has changed payroll services providers recently or changes them fairly frequently.

"A lot of these mistakes come down to the functioning of payroll," Schendt said.

System upgrades or provider switches can compromise the integrity of the department's data, he said, so it's a good idea to check in annually to make sure the system has your information, such as your employment start date, correct.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago 60611.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.