PenChecks Blog

Lower Your Risk of a Department of Labor Audit

No business wants its retirement plan to get audited by the Department of Labor (DOL). But according to a recent article in the Employee Benefit Advisor, companies often make mistakes that can trigger a DOL audit. The article addresses 10 of the most common mistakes, and serves as a good reminder for plan sponsors and TPAs in the retirement plan space not to overlook these areas.

Of the 10 mistakes, the one that really caught our attention was #9 – improper tax withholdings when employees take distributions from the plan – because it represents one of the more complex administrative tasks in the distribution process. Any time an employee takes a distribution from your plan, it may be subject to taxes. If you fail to properly process the tax withholdings from these withdrawals, it sends up a big red flag with the DOL. One thing you can be sure of is that the federal and state governments love their tax money, so they tend to watch it like a hawk!

The Root of the Problem
Offering a 401k plan is a great way to attract and retain talented workers while helping employees financially prepare for retirement. At the same time, it is a complex undertaking with many responsibilities. For example, every time an employee takes a distribution, the plan sponsor has to:

  • Determine if the distribution is taxable
  • If it is taxable, they must withhold the correct amount of taxes
  • Take into account any outstanding loans that will be offset
  • Remit all required taxes to the state and fed agencies – based on their time frame and their requirements
  • Process end-of-year tax reporting to federal and state agencies and the plan participant

These may not sound like difficult tasks. But many states are unclear on how much tax to withhold, and the amount of total tax remitted can also impact the filing deadline. As a result, companies often inadvertently withhold the incorrect amount of taxes and/or fail to remit them in a timely manner.

The Benefits of An Outsourced Solution
Depending on the number of plan participants you have, how often they take distributions, and how many different states you have to file in, processing tax withholdings can range from a small annoyance to a major administrative headache. That’s why more and more companies are turning to outsourced distribution services like those offered by PenChecks Trust.

Outsourcing plan distribution services provides a number of benefits that can reduce your fiduciary risk and your chances of a DOL audit. For example, as your outsourced vendor, PenChecks Trust assumes all responsibility for withholding the proper amount of taxes and remitting them on time. We also take care of the tax reporting to state and federal agencies, as well as plan participants.

More important, we make all tax payments from our own trust account, which means we are responsible for any mistakes, not you. And an outsourced solution like PenChecks Trust becomes even more valuable for pooled account plans or plans with brokerage account features that do not inherently have a single entity that can do check writing for the whole.

The Ideal Multi-State Solution
Every state has its own unique set of filing rules, including when and how they want you to file the taxes. In addition, some states still require paper filings while others only accept digital. By outsourcing the tax withholding process, you no longer have to keep up to date on all the rules for each state because the vendor does it for you.

By outsourcing, you won’t need separate electronic logins for each state. You won’t need to fill out and mail paper forms for the states that only take paper. You won’t need to track how many distributions you make in any given period of time in order to determine the appropriate tax remittance deadlines. All of which means you’ll have more time to focus on running your business and taking care of your customers.

If processing plan distribution tax withholdings and processing year-end 1099’s is draining your staff’s time and energy, an outsourced solution may make sense for your business. In the meantime, be sure to avoid those 10 mistakes listed in the Employee Benefit Adviser article and reduce your chances of the dreaded DOL audit.

Spiro Preovolos
Director, Business Development
PenChecks Trust

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