Managing a 401K? Get Out of Jail Free!

Sally sounded frantic on the phone. “You helped my friend Karen at the c0m0any she works for and I’m hoping you have a solution for me. Competition for talented employees is fierce. Business is up and I am using every resource at my disposal to fill the positions we lost as a result of COVID. I’m buried in admin work and my time needs to be devoted to hiring and onboarding new people.

“That’s an issue for many of my clients,” I commented, “but what’s really holding you down?”

“It’s our 401(k) plan that is causing the problem.”

“Okay, but what does your firm’s 401(k) plan have to do with hiring employees?”

“Our 401(k) plan requires a lot of administration. I have to remit employees’ salary deferrals payroll-by-payroll. I need to make sure new employees have the opportunity to enroll in the plan. Online enrollment helps but I still have to remember to give them the information. I approve every loan and every distribution before the money leaves the plan. And there are hardship withdrawals, too; with COVID, we had a lot of those. I make sure the 5500 is filed on time, and I make sure the 5500 gets signed and submitted to the Department of Labor….

“And then there are participant notices. I have to provide everyone who has money in the plan with various Department of Labor notices. And I just found out I was supposed to be sending notices to former participants who still have money in the plan. That didn’t happen and I hope that there are no penalties; I don’t know.

“And because I’ve been overwhelmed, I also failed to remit the employees’ salary deferrals on time. That’s been corrected but are their penalties for that? If there are, what forms do we need to file and who do we have to pay.?”

“Take a deep breath,” I encouraged. “You’re not alone; a lot of HR people are in over their heads right now. I’m sure we can get this sorted out.”

Sally sighed. “My friend Karen calls you her ‘get-out-of-jail-free card.’ She says you’re the master at taking care of messes like this. Can you do for us what you are doing for Karen’s firm? I’m about ready to…”

“Let’s take one thing at a time,” I said. “As far as the late deferrals go, we have to make the employees whole. They lost earnings when the salary deferrals were late. And not remitting deferrals on time caused a prohibited transaction. Those salary deferrals are not your company’s money; they belong to the employees. By not remitting on time, you commingled employer money with the 401(k) plan’s money.”

“That sounds awful,” said Sally. “How am I going to tell our company president about these penalties?”

“I know it sounds awful but it’s not unusual,” I said. “There’s a Department of Labor calculator we can use to figure out what the lost earnings were, calculate the IRS sanction for the prohibited transaction, and prepare the appropriate form. And I’m sure the penalties won’t be a big deal.”

“I’m so relieved” Sally said. “If my boss won’t be upset, that’s another load off my back.”

“Good,” I said. “Now let’s get you out from under that administrative avalanche! Our 3(16) service gets its name from a section of the Internal Revenue Code, but that’s neither here nor there. How would you feel if we could use 3(16) to take those admin hassles off your plate? Would you have more time to focus on hiring if my firm remitted employees’ salary deferrals and signed and filed your Form 5500s for you? We can also approve loans and distributions. There are just a few admin functions you’ll have to retain, but I have the tools, talent, and experience to take on the lion’s share of the work.”

“Wow!” said Sally. “This really is my ‘get-out-of-jail-free card.’ How do we get started?”