These five HR mistakes can cost your firm big bucks
A company found itself in the IRS’ crosshairs – and hit with a $20,000 fine – because of an honest mistake by the human resources department over how wages were defined in the firm’s retirement plan.
It could have been worse.
Retirement plans are among the few aspects of a business that are subject to review by two federal government agencies – the IRS and the Department of Labor. These agencies regularly share information on violations, meaning that a single violation could subject a company to two rounds of fines and penalties.
And any violation uncovered by either agency typically leads to a review of record-keeping over multiple years, increasing the likelihood of significant sanctions.
In this instance the IRS agreed to a negotiated settlement that cut the fine in half. But the case serves as cautionary tale about how HR departments can pose significant risks by unwittingly mismanaging a company’s retirement plan.
The rules and regulations pertaining to retirement plans create growing pressures for many chief financial officers, human resources managers, and accountants. This problem is exacerbated by turnover in HR departments. As new accounting responsibilities are heaped upon employees who might not have a solid understanding of plan documents and federal regulations, benefit management is likely to suffer.
Properly managing a company’s employee benefit plan typically falls on the HR department. Below are five common HR mistakes that can lead to severe financial consequences.
1. Improperly defining compensation.
The IRS has a rigid definition of compensation that encompasses wages, bonuses, overtime pay, commissions and other adjustments to an employee’s gross income. In the example cited earlier, the company failed to include employee bonuses as wages, which ran contrary to the company’s plan document.
2. Failing to follow plan entrance requirements.
Benefit plan participation requirements vary, but each retirement plan document must include clear standards and dates for entering employees. Entering an employee into a plan outside of the normal entrance requirements set forth in the plan document can lead to either an overpayment of benefits to employees or an underpayment into the fund that could lead to costly corrections and possible fines.
3. Misunderstanding how the plan is investing its assets.
Plan trustees are responsible for ensuring retirement plan assets are invested wisely, a duty that was reaffirmed by the U.S. Supreme Court this year in Tibble vs. Edison International. In that case, the court found plan trustees liable for their failure to regularly monitor investment selections. Working closely with your investment professional is an essential component of any responsible investment strategy.
4. Mishandling loans and hardship withdrawals.
Employees may elect to take hardship withdrawals for a variety of reasons, including repayment of qualified family medical expenses, purchasing a home or paying college tuition. Plan documents should clearly spell out eligibility for loans and hardship withdrawals, as well as repayment criteria (if applicable). It is also critical to ensure deferrals are delayed for six months once a hardship withdrawal is taken.
5. Missing participant documentation or information
Accurate record keeping is the key to avoiding pitfalls that can add up to significant financial losses – and fines. For example, failure to support an employee’s date of hire could lead to the employee entering into the plan too early or too late, or a missing enrollment form could lead to a dispute in terms of an employee’s contribution rate. Even a single missing document can undercut a company’s defense during an investigation by the IRS or the Department of Labor, and employers are responsible for almost all errors resulting from a failure to keep accurate records and adhere to plan document requirements.
Bottom line: It’s complicated, but a knowledgeable CPA can help ensure your company doesn’t run into trouble. The key here, however, is knowledgeable. Results of a 2014 audit quality study issued by the Department of Labor warned that CPA firms who conduct less than a hundred retirement plan audits annually fail to catch issues up to 76 percent of the time.
Thankfully, with the help of an experienced CPA, many of these errors are avoidable through examination of a company’s compliance with retirement plans and federal regulations. In the vast majority of cases, mistakes can be identified and corrected quickly by a certified public accountant who understands the complexities of employee benefit plans.
Kimbarley A. Williams is a director at Boyer & Ritter and has over 18 years of experience providing audit, accounting and tax services to employee benefit plans, business trade associations, charitable organizations, community foundations, and closely held businesses. She can be reached at 717-761-7210 or firstname.lastname@example.org