What Employers Need to Know About Employee Benefit Plans
Defined Contribution vs. Defined Benefit
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:
Review Plan Documents: We analyze the adoption agreement and summary plan description to understand plan elections and rules.
Evaluate Policies & Procedures: We examine how the plan is administered in practice.
Identify High-Risk Areas & Conduct Testing: We perform detailed tests to ensure compliance.
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.
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Audits can be difficult to navigate, but Hantzmon Wiebel is here to help. We can assist you in remaining compliant with the IRS’s guidelines. Learn more at https://www.hwllp.cpa/audit
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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.
