401(k) plans are great options for many small businesses, including restaurants. They help your employees save for retirement, add appeal to the compensation package, and are deductible business expenses. However, once the plan is up and running, administering it can be a challenge. 401(k) plans are overseen by the Department of Labor (DOL) and as your plan’s administrator, you must follow the guidelines outlined in the Employee Retirement Income Security Act of 1974 (ERISA). Below is a list of common 401(k) administration errors that restaurant owners need to be aware of in their operations.
The plan’s payroll deferrals will be based on “eligible compensation,” so make sure you understand what this term means. As long as you meet minimum ERISA requirements, there is the opportunity to define the term to fit your needs. Here are some compensation categories to consider:
- Regular Compensation: At a minimum, all plan documents specify that employees’ regular compensation (e.g. salaries, hourly wages, overtime, etc.) is eligible.
- Fringe Benefits: Fringe benefits, like the use of a company car, parking expenses, or a cell phone plan, may also be included.
- Bonuses: Many plan documents specify that all “W-2 wages” are eligible, which means regular compensation, fringe benefits, and bonuses will be included. If you want to leave bonuses out of the calculation, specify so in the plan document.
- Tips: Stay on top of tip reporting so you know how much your employees truly make. If the plan document designates tips as includable compensation, automatic payroll deferrals will be difficult. After income taxes are withheld, some employees will not have any payroll left to direct into their retirement plan. Instead, it may be necessary to collect 401(k) contributions from employees directly, to be paid out of their tips. We recommend excluding tips from the definition of compensation.
Restaurants that offer 401(k) packages may assume tipped employees will not be interested in participating, but ERISA guidelines require you to inform all eligible participants of the option to participate. Make this disclosure within 90 days that they become eligible.
It is also important to keep existing participants updated on their investments and the plan as a whole.
Current participants should receive:
- A summary description of the plan.
- A list of plan amendments, if any.
- Annual fee disclosure notices that report plan and individual-level fees.
- Quarterly statements of plan activity.
- Annual reports (the Summary Annual Report) of plan activity.
- Notices when investment options or fees are changing.
Distributing these disclosures to participants can be difficult. For instance, you will need to track down former (but still participating) employees’ home addresses and send their disclosures through the mail. Current employees can receive email notifications, but only if they use email regularly to perform their duties. For restaurants, paper disclosures may be the safest option. Check with your TPA to see if they are able to send the required disclosures to participants.
In recent years, the DOL has audited plans specifically to see if contributions are remitted timely. The window to remit your employees’ contributions is tight, typically within two or three days. There is a safe harbor for small plans of seven days. The guidelines specify that they should be deposited as soon as the company can segregate contributions from the rest of their assets – in other words, ASAP. Since the DOL has been cracking down on timely remittals, this is an important area of 401(k) plan compliance for you to get right from the beginning.
If you have made late remittals in the past, there is a program that can help. The DOL’s Voluntary Fiduciary Correction Program allows you to resolve past mistakes and avoid DOL penalties. You must be willing to pay back “lost earnings” to your plan participants. Even remittances that were made just two or three days late can rack up lost interest, especially if those mistakes were made months or years in the past. If you follow the program closely, it is easy to avoid excise penalties and come back into compliance with the DOL.
Some other common mistakes you may encounter are:
- Enrolling employees prior to their eligibility date. The plan document will outline when employees can enroll in the plan, so take a close look before you sign somebody up.
- Enrolling a non-eligible employee. If non-eligible employees participate in the plan, then return their contribution and true-up tax withholdings.
- Participant 401(k) election changes. It is important to make any participant election changes timely.
- Forgetting to commission an audit. Audits are not always required, but when they are, it is important for you to commission one. First-time audits are required once your number of eligible participants exceeds 120. It is irrelevant how many employees choose to participate in the plan; this magic number is based on the number of eligible participants.
- Incorrectly allocating employer matches. Employer matches should be allocated based on your contribution formula found in your plan document. Make sure you are doing it correctly.
- Discriminating against certain employees. Qualified retirement plans must go through discrimination testing to ensure the plan does not favor highly compensated employees. For example, you may not pass discrimination testing if your tipped workers do not participate in the plan, yet all of your managers do. Despite your best intentions, employees across the entire income spectrum should participate.
As your 401(k) plan’s administrator, you have a fiduciary duty to follow the guidelines outlined by the DOL and ERISA. Your fiduciary responsibilities require you to follow plan documents, diversify investments, act in the interest of the participants, and keep expenses reasonable. If you would like assurance that you are doing all that you need to do, feel free to reach out to our team. We provide consulting services to restauranteurs and can even perform your 401(k) audit if need be. We look forward to hearing from you.
Article written by:
Dustin Minton, CPA, MBA
Director, Assurance & Business Advisory Services