What Employers Need to Know About Employee Benefit Plans

There are two main types of benefit plans: defined contribution plans and defined benefit plans. A defined contribution plan, such as a 401(k), ESOP, or profit-sharing plan, specifies the amount an employee contributes “up front,” but the final amount they can withdraw depends on market performance and is not guaranteed. In these plans, the investment risk falls on the employee since their returns are uncertain. A defined benefit plan, on the other hand, guarantees a specific benefit amount upon retirement, determined by a formula set by the employer, often based on years of service. Here, the risk is on the employer, as they must ensure they can pay the promised benefits regardless of their business’s future financial status. Both types of plans can help attract top talent and improve staff retention. For example, an employee may be motivated to contribute to a 401(k) if they know their employer will match a percentage of their contributions. With a defined benefit plan, employees receive a guaranteed annual payout regardless of their own contributions. Both options offer valuable incentives that make employment more appealing. Tax Advantages for Employers and Employees: Employees can choose to contribute either pre-tax or Roth funds, each offering different tax advantages, some providing immediate benefits and others offering long-term savings. Employers also gain tax benefits if they match employee contributions or make their own contributions, as these expenses are tax-deductible. Oversight and Regulations: Several government agencies monitor and regulate these benefit plans, with the most significant being the Department of Labor (DOL). Within the DOL, the Employee Benefits Security Administration (EBSA) is responsible for ensuring that retirement and health plans comply with ERISA (Employee Retirement Income Security Act of 1974). ERISA is the primary federal law that establishes minimum standards for retirement plans. One key change introduced by the SECURE Act 2.0 in 2022 was the updated requirement for when retirement plans must undergo a third-party audit. Previously, plans needed an audit if they had more than 100 eligible employees. Under the new rule, an audit is only required if a plan has 100 participants with an account balance. This distinction means fewer companies and organizations need to undergo audits. The Retirement Plan Audit Process: At Hantzmon Wiebel, retirement plan audits are conducted with a focus on several critical aspects: 1. Review Plan Documents: We analyze the adoption agreement and summary plan description to understand plan elections and rules. 2. Evaluate Policies & Procedures: We examine how the plan is administered in practice. 3. Identify High-Risk Areas & Conduct Testing: We perform detailed tests to ensure compliance. 4. Provide Audited Financial Statements: After completing the audit, we deliver financial statements for Form 5500 filing with the DOL. Whether or not your retirement plan is audited, it likely has a mandatory filing requirement for Form 5500 or 5500-SF (short form). This filing is due seven months after the end of the plan year. For example, if your plan follows a calendar year, the deadline would be July 31. However, you can obtain an automatic extension that moves the deadline to October 15. Best Practices for Retirement Plan Management: Every business should keep its retirement plan documents easily accessible. Those responsible for managing the plan, whether plan administrators or primary fiduciaries, must fully understand its rules and ensure compliance. Many businesses are caught off guard when they uncover errors in their retirement plans, and the penalties for uncorrected mistakes can be significant. To avoid costly consequences, it’s crucial to seek professional assistance as soon as an issue is identified. Hantzmon Wiebel understands the complexities of retirement plan audits and is committed to helping employers navigate compliance with confidence. Whether you need assistance with plan audits, Form 5500 filings, or understanding tax benefits, our team will provide expert guidance to keep your retirement plan on track. Partner with us to ensure compliance, protect your business, and provide employees with a secure future.