Why Compliance Matters
For car dealership owners, offering a 401(k) plan is a strategic way to attract and retain top talent while supporting employees’ long-term financial security. However, administering a 401(k) plan comes with significant responsibilities. Regulatory compliance is critical—failure to adhere to the rules can expose a dealership to fines, additional contributions, and potential damage to employee trust. Errors, even if unintentional, can lead to costly corrective measures and increased scrutiny from the Department of Labor (DOL).
Dealership owners need to understand common compliance challenges and the steps required to avoid operational failures. This article highlights the most frequent errors in 401(k) plan administration and provides actionable solutions to mitigate risks.
Understanding Compensation Definitions
One of the most common mistakes in a 401(k) plan involves the definition of compensation. Each plan’s adoption agreement specifies what constitutes “plan compensation,” which can include wages, bonuses, commissions, and other earnings. If certain types of compensation are excluded, this must be clearly stated. Dealerships must ensure that employee deferrals are calculated accurately based on this definition.
If the plan defines bonuses as part of compensation but deferrals are not withheld, this creates a compliance issue. Dealers should work with their plan administrator to regularly review the adoption agreement and ensure it reflects current practices.
Another common issue arises from errors in payroll systems. Pay codes used for infrequent payments, such as one-time bonuses or special commission payments, may not be properly configured to account for deferrals. Dealers should implement strong payroll controls and conduct periodic audits to ensure all types of compensation are appropriately coded.
Handling Deferral Changes
When employees update their deferral percentages through the plan’s participant portal, those changes must be accurately reflected in payroll. Delays or mistakes in processing these changes can lead to under- or over-contributions, both of which require correction.
Errors are more likely when plans allow deferral changes with every paycheck. While this flexibility benefits employees, it increases administrative complexity. Dealerships can mitigate this risk by amending their plan to limit deferral changes to quarterly or semi-annual intervals. Automating the integration between payroll systems and the plan’s recordkeeping system can also help ensure changes are implemented accurately and on time.
Timely Remittance of Contributions
The DOL requires that employee contributions withheld from paychecks be remitted to the plan’s trust as soon as administratively feasible. This standard is not only about timeliness but also about consistency. If a dealership demonstrates the ability to remit contributions within two business days, the DOL expects this timeline to be maintained consistently.
Inconsistent remittance schedules can trigger regulatory scrutiny. Dealerships should establish clear processes and designate backup personnel to handle remittances during staff absences. Automating the contribution remittance process through payroll systems can further reduce the risk of delays.
Maintaining detailed records of remittance dates is essential. These records provide evidence of compliance during plan audits and can protect the dealership in the event of a DOL investigation.
The Role of Advisors
Dealers don’t have to navigate the challenges of administering a 401(k) plan alone. Third-party administrators (TPAs) are valuable partners in plan design and ongoing management. They can provide guidance on critical aspects, such as defining compensation and interpreting plan documents. However, it’s important to note that the dealer is responsible for the accuracy of the information provided to the TPA.
Certified Public Accountants (CPAs) with expertise in employee benefit plan audits are another key resource. They can help identify compliance issues and recommend corrective actions before they escalate. Dealers should consider consulting legal counsel specializing in Employee Retirement Income Security Act law to stay informed about regulatory changes that may affect their plan.
Preventive Measures for Compliance
Proactively addressing compliance risks can save dealerships significant time and money. Here are some best practices:
- Conduct Regular Reviews: Annual reviews of the plan and payroll processes can help identify discrepancies and ensure all procedures align with regulatory requirements.
- Invest in Training: Educating payroll and administrative staff about the plan’s rules and the importance of compliance reduces the likelihood of errors.
- Leverage Technology: Automating processes, such as deferral changes and contribution remittances, minimizes manual errors and ensures timely execution.
- Engage Experts: Partnering with experienced TPAs, CPAs, and legal advisors provides access to specialized knowledge and resources that enhance compliance efforts.
The Road Ahead
A compliant 401(k) plan is more than a regulatory obligation: it’s a reflection of a dealership’s commitment to its employees’. By understanding common pitfalls and implementing preventive measures, dealerships can protect themselves from costly mistakes while fostering employee trust. With careful planning and the support of knowledgeable advisors, dealership owners can confidently manage their 401(k) plans, ensuring they remain valuable assets for both the business and its workforce. Proactive compliance management not only safeguards the dealership from regulatory penalties but also strengthens its reputation as an employer of choice.
