The Ins & Outs of Employee Benefit Plans

As the industrywide talent crisis persists, business owners must get serious about using employee benefit plans as a way to recruit and retain quality talent. Many factors are involved in a hearty employee benefit plan, most notably the fiduciary responsibility of ensuring the plan runs according to specific Internal Revenue Service (IRS) and Department of Labor (DOL) rules and regulations. To mitigate the risk of common errors in a plan and to maximize participation among employees, business owners need to be educated about the ins and outs of setting up an individual plan.

One common challenge that construction companies face is properly educating employees about the importance of enrolling in a plan that helps them build for their retirement. To increase enrollment rates, construction companies should consider taking advantage of automatic enrollment as soon as employees become eligible to participate. Automatic enrollment is an excellent way to increase a company’s participation rate, but business owners should keep in mind that it does not ensure that employees will update and adjust the automatic deferral amount (typically 1 to 3 percent) or their selected investments to meet their individual retirement goals.

Retirement education is another hurdle that construction companies must overcome when introducing a new employee benefit plan. With construction’s high employee turnover rate, it is difficult to hold an annual, or even quarterly, meeting to discuss the retirement plan. Companies should consider using a local adviser to educate employees as a group, as individuals or via virtual meetings.

Once enrolled, it is common for employees to lose sight of their retirement account and forget to adjust their contribution rate. To account for this, construction companies can implement a yearly automatic deferral increase. Automatic increases help employees save for retirement in accordance with yearly pay increases. Once a company’s employee benefit plan is up and running, compliance is the next big focus. Sponsors should be aware of the most common errors that occur when operating a plan. Companies must ensure that terms are being adhered to and that plan documents are regularly updated to account for any new regulatory requirements.

Because employee benefit plans have some unique nuances, it is beneficial for companies to have their plan documents reviewed by an accounting firm to evaluate whether or not the company is operating accordingly. If a company is already required to have an audit performed, it is important that it is performed by a certified public accountant (CPA). The DOL recently sent a letter to retirement plan administrators urging the importance of hiring an experienced accountant to perform audits. In the letter, experience, training, license status and peer reviews were listed as some of the most important factors to consider when choosing an auditor for a company’s employee benefit plan.

The most glaring error that advisers come across when reviewing plan documents is finding that the company is not using the correct definition of compensation. For example, companies often assume that including all wages as compensation is broad enough to avoid compliance issues, but this method actually tends to complicate things. When all wages are programmed as compensation, an employee is not allowed to take their bonus—free of retirement contributions—without special verbiage being added to the plan document.

The inclusion of The Davis-Bacon Act, which adds complexity to a plan if the company pays the prevailing wages as a retirement benefit, is of specific concern to construction companies with federally-funded work. Companies need to be sure that the third-party administrator, or record keeper, correctly tracks these wages separately, as they are not typically included in match calculations because they are not considered compensation.

A robust employee benefit plan is a great addition for companies looking to boost employee recruitment and retention efforts. The plan should be designed to provide the greatest benefit to all employees, with features that encourage the maximum amount of retirement savings. Providing access to a financial adviser, offering company match options and allowing take-out loans within a plan will appeal to potential employees and can help set a company apart from the competition. However, there are potential pitfalls when it comes to compliance with the plan document and various rules and regulations that govern employee benefit plans. These pitfalls can be avoided by focusing attention on plan design and operation and relying on qualified service providers (e.g., investment advisers, third-party administrators and accountants).