Is Your Small Business 401(k) Plan ERISA Compliant?

Author: / 24 Jun 2023 / 401(k) Plan Information

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Providing your employees a 401(k) plan is a great way to attract and retain top talent. But offering a small business retirement plan comes with many responsibilities. These include ensuring that your plan complies with the Employee Retirement Income Security Act (ERISA) regulations. We’re breaking down how you can keep your small business in compliance – and avoid penalties and fines.

What is ERISA?

ERISA, or the Employee Retirement Income Security Act, is a federal law that sets minimum standards for most private-sector employee benefit plans. This covers retirement, health, and other welfare benefit plans. Need more info? We’ve broken down the nuances of ERISA.

Determine Plan Type and Eligibility Requirements

The first step to ensure ERISA compliance is to identify what type of 401(k) plan you are offering and its eligibility requirements. Traditional 401(k) plans require employers to perform nondiscrimination testing to ensure that the plan doesn’t unfairly favor highly compensated employees. Safe Harbor 401(k) plans are exempt from this testing, but you must make annual contributions to their employees’ accounts.

You also need to establish eligibility requirements for your 401(k) plan. Don’t forget to set minimum age and service requirements for employee participation in the plan. ERISA requires that employees who meet the eligibility requirements be allowed to participate in the plan within a reasonable period after becoming eligible.

Plan Documentation

Also required under ERISA: Have it all in writing. Any and all employee benefit plans, including 401(k) plans, must be in writing and include certain provisions.This includes having a plan document and a summary plan description (SPD) for your small business’s retirement plan.

This document should outline the plan’s terms and conditions, eligibility requirements, contribution limits, and vesting schedules. The SPD provides a summary of the plan’s key features in plain language, and should be updated and distributed to participants regularly.

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Fiduciary Responsibility

As a 401(k) plan sponsor, you play a crucial role in overseeing and administering the retirement plan offered to your employees. Under the Employee Retirement Income Security Act (ERISA), you are entrusted with a fiduciary responsibility, which means you are legally obligated to act in the best interests of your employees and ensure the plan operates in a prudent manner.

First and foremost, managing the plan prudently is a key aspect of your fiduciary duty. This entails making informed decisions and exercising due diligence when it comes to the plan’s investments, expenses, and overall administration. Prudent management involves conducting thorough research, analyzing investment options, and selecting investments that align with the best interests of your employees. This includes considering factors such as risk tolerance, potential returns, and fees associated with the investments.

Another crucial aspect of your fiduciary responsibility is diversifying investments within the plan. Diversification aims to reduce the overall risk by spreading investments across different asset classes, such as stocks, bonds, and mutual funds. By diversifying, you help minimize the potential impact of a single investment’s performance on the entire portfolio. This approach aims to provide participants with a more balanced and stable investment strategy.

In addition to managing investments, monitoring service providers is an essential part of fulfilling your fiduciary duty. Service providers may include recordkeepers, custodians, investment advisors, and other entities involved in the administration of the 401(k) plan.

It is important to regularly review the performance and services provided by these vendors to ensure they are meeting their obligations and acting in the best interests of plan participants. This includes assessing their fees, evaluating the quality of services rendered, and considering whether alternative providers might offer more advantageous terms or improved performance.

Reporting and Disclosure

Under the provisions of the Employee Retirement Income Security Act (ERISA), employers who offer retirement plans, such as 401(k) plans, have specific requirements regarding the disclosure of information to plan participants. These disclosure requirements are in place to ensure transparency and provide participants with essential information about their retirement benefits.

Reports and Summaries

  • One of the key disclosure obligations is to provide participants with a summary of material modifications. This summary outlines any significant changes or updates made to the plan that may affect participants’ rights or benefits. It is crucial to communicate these modifications in a timely manner so that participants can stay informed about how their retirement benefits may be impacted. By providing this summary, employers fulfill their responsibility to keep participants up to date on any material changes to the plan.
  • Annual reports are another important component of the disclosure requirements. Employers are required to provide participants with an annual report that contains comprehensive information about the financial status and operations of the plan. This report typically includes details about the plan’s investments, expenses, contributions, and distributions. It helps participants understand the performance and overall health of the plan, enabling them to make informed decisions about their retirement savings.
  • Furthermore, employers must also furnish participants with a summary annual report (SAR). The SAR is a condensed version of the annual report and provides participants with a summary of the plan’s financial information. It includes details such as the plan’s assets and liabilities, contributions and benefits paid, as well as any fees or expenses incurred. The SAR is intended to be easily understandable and provides participants with a snapshot of the plan’s financial activity during the year.
  • In addition to providing information directly to participants, employers are required to file annual reports with the Department of Labor’s Employee Benefits Security Administration (EBSA). These reports, known as Form 5500, provide the government with important data about the plan’s operations, including financial information and compliance with ERISA regulations.

The filing of these reports enables the government to monitor and oversee the administration of retirement plans and ensures that employers are meeting their fiduciary responsibilities.

By complying with these disclosure requirements, employers fulfill their obligations to provide participants with essential information about the plan.

This transparency helps participants understand the structure, performance, and changes to their retirement benefits, empowering them to make informed decisions regarding their financial future. It also promotes accountability and oversight of retirement plans, safeguarding the interests of plan participants.



Ubiquity is not a registered investment advisor, and the information provided herein should not be considered legal or tax advice. We recommend consulting with your financial planner, attorney, and/or tax advisor for personalized advice. 

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357

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