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The Responsibilities of an Employee Benefit Plan Sponsor

As global transactions continue to shift over to the digital environment, the need for paperwork has certainly faded. Many employee benefit plan service providers no longer require extensive amounts of paperwork because all of your information can now be easily submitted online. Employee benefit plan management teams are also decreasing their amount of required paperwork as they now provide information to third-party service providers through, in some instances, entirely electronic means. However, benefit plan sponsors must be cautious as the IRS does not support one of the new online certification practices.

Recently, 401(k) loans to participants and distributions – due to participant hardship – have fallen under the scrutiny of the Internal Revenue Service (IRS). The practice in question is a new tendency to allow participants to “self-certify.” This allows individuals to certify that they meet a set of criteria that permits them to receive loans or distributions.  However, the IRS states that the plan sponsor is responsible for ensuring that all participants are accurately certified. Also, the plan sponsor is not permitted to rely on “e-certification” as the only form of evidence for a participant’s eligibility.

A plan sponsor must maintain other substantial documentation to provide in an IRS examination. If a sponsor does not have enough documentation (either electronic or on paper) the IRS may deem your plan as a “qualification failure” and seek to have corrective actions carried out according to the Employee Plans Compliance Resolution System (EPCRS).

It is essential that plan sponsors:

  • Possess substantial paperwork and electronic files that sufficiently document the records of a participant loan.
  • Maintain documentation that describes the hardship a participant is encountering. This documentation must also be kept when a service provider only requires a “self-certification.”

Though it may be tempting to rely on the simplicity of self-certification, benefit plan sponsors must be cognizant of this increased scrutiny by the IRS. While an easy certification process may immediately save you time and money, it may severely cost a company in the long-run.

If you have questions about your employee benefits plans, contact Dani Gisondo at 440-449-6800. Or, visit our employee benefit plan services page to find out what our business advisors can do for you.

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