6 tips to avoid problems with your auto dealership 401(k) retirement plan

The nature of the auto dealership industry can present a myriad of challenges when it comes to establishing and managing a 401(k) plan.

From the sales floor to service, auto dealers have a wide range of employee types and compensation structures that present unique issues when managing retirement plans. Employees under one rooftop might be in sales, marketing, HR support, administration, or “fixed operations”. Employees are paid based on commission, flat rate, hourly, salary or a combination of these pay types as well as receiving bonus pay throughout the year.

All the complexity can lead to mistakes and the potential for costly penalties from the U.S. Department of Labor and the IRS.

6 Ways to Prevent Costly Pitfalls

1. Review Eligible Employees: In December 2019, Congress passed the SECURE Act, which among other changes, expanded the definition of eligible employees. Under the Act, part-time employees will now be eligible to participate in saving for retirement. Starting in 2021, the new law allows eligibility for employees who have worked at least 500 hours per year for at least three consecutive years, as long as the employee reaches age 21 at the end of the three-year period. Be sure to review your payroll system for part-time employees to ensure your payroll system has the ability to track hours worked.
2. Consider a Small Plan Checkup: Historically plans below the 120-employee mark are not required by law to have an annual audit. However, even if your plan falls below the threshold for an annual audit, still consider a “small plan checkup’’ as preventative maintenance to protect against expensive penalties. By going through a small plan checkup, our employee benefit plan specialists can review your plan to evaluate if you are making the correct deferrals for your employees; you have an accurate count of employees who are participating or should be participating in your plan; you are following the definition of plan compensation and employer match or profit sharing as defined by the plan document. A small plan checkup will also look at your compliance with hot topics for the IRS and DOL.
   • Additionally, it is imperative as part of your employee benefit plan maintenance to remove employees from your plan when they retire or terminate employment. Otherwise, the IRS and DOL consider them participants, costing you annual administrative fees and possibly pushing you to an annual audit that could have been avoided. Keep in mind that after your plan hits the 120 mark, it must drop below 100 before annual audits are not required under current law.
3. Empower the Team: When the results of audits or plan testing are received, include high-level financial personnel like the controller or CFO, along with the office manager or HR to review the results.
4. Align Compensation and Deferrals: Your 401(k) plan details the types of compensation that qualify for deferral. Some dealers count bonuses as part of 401k eligible compensation, while others might not. Make sure you work with an experienced third-party administrator (TPA) that can assist in correctly setting up and monitoring your plan. The Plan document describes your choice of how deferral is calculated and how eligible plan compensation is determined. With a properly established process, you can be assured that deferrals are accurately calculated, withheld and remitted.
5. Consider Consolidating Plans: Some dealers establish separate plans for different locations or employee groups: However, if personnel frequently move among locations, it can be challenging to maintain the accuracy of deferral calculations and withholdings. Your TPA can help you decide if having one plan is a better solution.
6. Avoid Top-Heaviness: The IRS considers a plan “top-heavy” if the retirement accounts of high-earning, key employees account for more than 60 percent of the total value of plan assets. Avoiding this issue and correcting it can be complicated, which is why it is crucial to consult with an experienced TPA.

Pay attention to mandated nondiscrimination testing, meant to prevent plans from favoring highly compensated employees. Once the plan is considered top heavy, there is no going back for that year. In one case, a dealership’s third-party administrator pointed out its top heaviness but failed to explain the significance of becoming a top-heavy plan. In order to prevent the plan from being disqualified, that dealer had to compensate for the plan’s imbalance with a non-negotiable contribution of over $100,000.

When a plan’s balance creeps toward 60 percent, simple solutions include having highly compensated employees stop deferrals, withdraw some of their money or put excess savings into IRAs. These strategies can be discussed with your TPA.

Paying close attention to retirement plans pays dividends by preventing slip-ups that cost money. The trusted professionals at Boyer & Ritter LLC can help auto dealers safely navigate the retirement-plan landmines unique to their industry.

Mariya Cawley is a manager at Boyer & Ritter LLC and a senior member of the firm’s Dealership Services Group and Employee Benefit Plan Groups. Contact Mariya at 717-761-7210 or mcawley@cpabr.com

Kimbarley A. Williams, CPA, is a principal at Boyer & Ritter LLC, where she co-chairs the Employee Benefit Plan Group. Contact Kimbarley at 717-761-7210 or kwilliams@cpabr.com