June 28, 2017
Who Should Run Your 401(k) Plan?
Many businesses use payroll providers to pay their employees and keep all of that important info straight for end-of-the-year taxes. Good stuff. But a couple of the larger payroll services have begun offering 401(k) administration services. Now, both services require taking money out of employee paychecks, but the similarities pretty much end there.
New York-based ERISA attorney Ary Rosenbaum “respectfully disagrees” with the idea of this important function being a natural segue from doing payroll. Rosenbaum says:
1. Providing payroll service is an automated, computerized system that is dependent on getting the correct tax rates from the Federal, State and Local Government
401(k)s are highly structured tax exempt entities. They must continuously abide by the Internal Revenue Code, ERISA, Department of Treasury regulations, Department of Labor regulations and the terms of plan documents.
2. Errors in payroll are infrequent as long as the data provided is clean.
Errors in retirement plans can happen during contribution deposits, trade processing, determination of eligibility and vesting, discrimination testing and the preparation of Form 5500.
3. Payroll has few moving parts and rarely changes
Retirement plans have so many moving parts, that an error that requires correction and reporting to the proper governmental authority can occur on a daily basis. Some errors may result in plan disqualification where prior employer deductions for plan contributions are disallowed and plan participants must immediately report their retirement plan contributions as income. This is why plan sponsors should carefully select who their third party administrator (TPA) will be.
Rosenbaum continues, “except for the withholding of salary deferrals, 401(k) plan administration has nothing to do with payroll. 401(k) plan administration is a highly specialized field, dependent on getting correct data from the Plan sponsor and making the correct calculations on the administrator side. Bad data will always get a bad testing result. So a large portion of what a 401(k) administrator might have to do is to check whether the data being provided by the client is error free.”
The retirement planning experts at Benefit Equity agree with Rosenbaum that payroll providers, while very necessary and useful to businesses, really have no business acting as third party administrators for 401(k) plans. They lack the specialized expertise, the experience and the desire to maximize all retirement planning options for the client. And any errors can be very costly and dangerous for the business.
Let’s face it, nobody is looking for more worries. So retire yours and work with Benefit Equity to design and administer your company’s retirement plan.
Why You Shouldn’t Hire Your Payroll Company To Run Your 401(k) Plan