Common ERISA Compliance Mistakes and How to Avoid their Costly Consequences

One small compliance error could cost your organization more than just a little time—it could lead to hefty fines or even legal action. Under the Employee Retirement Income Security Act (ERISA), even seemingly minor mistakes in managing your retirement plan can have serious financial consequences and damage your company’s reputation. As an HR director or benefits manager, staying on top of these details is crucial to protect both your employees and your organization. 

ERISA compliance is not optional; it’s critical to ensure that your employees’ retirement benefits are managed responsibly and in accordance with federal guidelines. For HR directors and benefit managers, understanding the most common mistakes—and how to avoid them—can save your organization both financial and operational headaches. This guide walks you through the top ERISA compliance pitfalls that could cost you and provides actionable tips to avoid them.  

What Is ERISA and Why Does Compliance Matter?  

Before we jump into the mistakes, it’s important to understand the scope of ERISA. The Employee Retirement Income Security Act (ERISA) is a federal law meant to protect employees by regulating the establishment and operation of retirement and benefit plans. ERISA ensures plan sponsors act in participants’ best interests by setting standards for fiduciary responsibilities, reporting, and disclosure.  

Common Mistake #1: Failing to Stay Updated on Regulatory Changes  

Consequence: The laws governing ERISA are continually evolving. Neglecting to stay informed about regulatory updates could mean your retirement plan no longer meets compliance standards, putting you at risk of financial penalties and legal scrutiny.  

Real Costs: Noncompliance with newly issued Department of Labor (DOL) regulations could result in penalties exceeding $2,000 per day for late filings.  

How to Avoid It:  

• Schedule Regular Training: Dedicate time for your HR or benefits team to attend ERISA webinars, conferences, or training sessions.  
• Partner with Experts: Work with an advisor, third-party administrator (TPA) or ERISA attorney to help you monitor updates and ensure your plans remain compliant.  
• Set Automated Alerts: Subscribe to alerts from the Department of Labor (DOL) or other governing bodies to stay updated on changes.  

Common Mistake #2: Missing or Delayed Form 5500 Filings  

Consequence: The Form 5500 serves as the government’s primary method for overseeing benefit plans. A late or missing filing could trigger audits and steep penalties.  

Real Costs: Penalties for failing to file Form 5500 can add up to $2,586 per day. That’s not a typo—it’s per day.  

How to Avoid It:  

• Create a Compliance Calendar: Mark key deadlines, including the due date for your Form 5500 (typically the last day of the seventh month after the plan year ends).  
• Use Compliance Software: Leverage software that tracks filing deadlines and sends reminders.  
• Hire a Professional: A dedicated retirement plan administrator can prepare and file Form 5500, ensuring accuracy and timeliness.  

Common Mistake #3: Lacking Proper Plan Documentation  

Consequence: ERISA requires plan sponsors to maintain specific, up-to-date documentation such as Summary Plan Descriptions (SPDs) and plan documents. Missing or outdated documentation can lead to enforcement actions and participant lawsuits.  

Real Costs: If the DOL finds documentation issues during an audit, penalties can quickly mount. Each instance of a failed SPD distribution can cost $110 per day per participant.  

How to Avoid It:  

• Conduct Regular Audits: Schedule a plan document review annually or whenever there are plan changes.  
• Use Checklists: Keep a checklist of all required documents and their last update dates.  
• Engage Outside Support: Partner with a compliance consultant to review and update your plan documentation.  

Common Mistake #4: Mishandling Participant Contributions  

Consequence: ERISA requires prompt deposit of employee contributions into the retirement plan. Delays or mishandling these funds can be seen as a misuse of employee earnings and could lead to civil penalties and lawsuits.  

Real Costs: Late deposits may incur penalties equivalent to 15% of the delayed amount. Worse, employees may lose trust in your company.  

How to Avoid It:  

• Implement Controls: Establish clear internal processes to ensure timely deposits—preferably within the shortest time possible.  
• Set Alerts: Use accounting software with built-in reminders for contribution deadlines.  
• Consider a TPA: A third-party administrator can take on the administrative burden to prevent errors.  

Common Mistake #5: Overlooking Employee Eligibility and Participation  

Consequence: ERISA has strict guidelines for employee eligibility, ensuring all qualified employees are allowed to participate in retirement plans. Excluding eligible employees could lead to corrective contributions, penalties, and legal action.  

Real Costs: The costs of corrective contributions, combined with potential penalties, could surpass thousands per excluded employee.  

How to Avoid It:  

• Maintain Transparency: Use a centralized system to track employee eligibility.  
• Confirm Enrollment Dates: Double-check enrollment timing with payroll data to avoid issues.  
• Conduct Regular Reviews: Perform periodic audits to ensure no eligible employees have been overlooked.  

Common Mistake #6: Poor Fiduciary Oversight  

Consequence: The fiduciary role in ERISA plans requires acting solely in the best interest of plan participants. Failing to meet this responsibility—whether intentional or not—could lead to lawsuits or financial penalties.  

Real Costs: Fiduciary breaches are subject to DOL investigations and participant lawsuits, often resulting in substantial compensations and penalties.  

How to Avoid It:  

• Educate Fiduciaries: Provide ERISA-focused fiduciary training to those responsible for the plan.  
• Establish Clear Protocols: Maintain written processes for decision-making, plan investments, and fee evaluations.  
• Seek Expert Help: Work with a retirement plan consultant or fiduciary advisor to ensure ongoing compliance.  

Build a Stronger Retirement Plan with the Right Partner  

Avoiding costly ERISA compliance mistakes starts with knowledge, but executing compliance procedures requires time, expertise, and ongoing effort. That’s where we come in—at OpenPlan, our experienced team specializes in retirement plan administration and ERISA compliance.  

From handling documentation and timely filings to ensuring your fiduciary responsibilities are on point, we simplify the complexities so you can focus on what you do best—leading your organization.  

Contact us today to learn how we can help you safeguard your business while offering your employees the secure retirement plans they deserve.  

 

This content is for informational and educational purposes only and should not be construed as individualized advice or a recommendation for any specific product, strategy, or course of action. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. This material is not intended to, and does not, create a fiduciary relationship under ERISA or any other applicable law. For individualized advice tailored to your specific circumstances, please consult with your adviser.