It’s Time To Get A Good TPA
Brian Price, CPA | July 21, 2018
As auditors of 401(k) plans, we see all kinds of mistakes that put our clients in harm’s way of the IRS and Department of Labor. With all of the complex rules surrounding 401(k) plan administration, it’s common for clients to consistently make mistakes. The sad part is that most of the mistakes made by employers can easily be caught and rectified if they simply used a good TPA.
TPA stands for third party administrator. If your 401(k) setup has a separate TPA, it’s because your recordkeeper doesn’t perform any administrative work for your plan. In this case, your recordkeeping solution is “unbundled”, meaning that you have both a recordkeeper and a TPA.
Nowadays, it’s very common for the recordkeeping institution to also act as an administrator (i.e. a “bundled” solution), eliminating the need for a separate, third party administrator.
The TPA is responsible for common administrative tasks such as plan document maintenance, form 5500 preparation, creating match and profit sharing calculations, and performing non-discrimination testing.
Most of the mistakes we see with our clients occur when the recordkeeper or TPA are performing only a few essential services for the plan or they are simply bad at their jobs.
The services that a good TPA will perform is as follows:
- Keeping the documents of the plan updated annually to ensure the plan stays compliance with the current law.
- Making sure your payroll department follows the “Definition of Compensation”. You would be amazed at how many employers don’t know they even have to follow a definition of compensation when calculating employee deferrals.
- Performing discrimination testing and providing solutions to self-correct any failures
- Making sure eligible employees are timely enrolled in the plan
- Testing to ensure IRS plan limits haven’t inadvertently been exceeded
- Verifying employee deferrals are timely remitted to the plan. It’s not uncommon for employers to submit deferrals weeks after a pay date which is a huge DOL no-no.
- Top heavy testing to ensure that the plan doesn’t favor highly compensated or “key employees”
- Reviewing employee records to verify their Hardship Distribution actually meets the standards set by the IRS
- Keeping up with reporting obligations and filing the Form 5500 on time
In order to reduce costs, “bundled” providers rely upon automation to make calculations and create reports. Not everything mentioned above can or is automated, thus the “bundled” providers force the complexity of plan compliance upon the employer. This is why we see so many mistakes. If you’re experiencing problems in any of these areas … it’s time to switch and get a good TPA.