1. Not timely depositing employee contributions into qualified retirement plans.

Employers sometimes wait too long to deposit salary deferrals into a qualified retirement plan. According to the Department of Labor (DOL), such deposits should be made as soon as the contributions can be reasonably segregated from the employer’s general assets. If deposits are not timely made, the DOL and Internal Revenue Service (IRS) may levy fines, penalties and retroactive earnings for late contributions. The deposit rule for salary deferrals applies to all types of employee contributions, including special deferrals (such as catch-up contributions), after-tax contributions and loan repayments.

Solution: Deposit employee contributions as soon as reasonably possible following issuance of the paycheck from which the contribution was withheld.

2. Not making matching and profit-sharing contributions on a timely basis.

Many employers make the mistake of not making these contributions on a timely basis. The plan document may contain deadlines for these contributions. If contributions are not made on a timely basis, the same penalties as above apply.

Solution: Read your plan documents and understand when matching and profit-sharing contributions must be made. 

3. Late enrollment of employees into qualified retirement plans.

Employers often fail to timely enroll employees in qualified retirement plans, and sometimes even try to exclude part-time employees from participation. If you wrongfully exclude employees, you can jeopardize the plan’s tax-qualified status. If the error is discovered in an audit, the DOL and IRS may levy retroactive employer contributions, elective deferrals and earnings for employees that were wrongfully excluded.

Solution: Closely monitor employees’ attainment of the plan’s eligibility criteria and timely provide eligibility information to plan service providers.

4. No plan document or summary plan description.

Failure to provide a plan participant with an SPD within 30 days of an employee request carries a maximum $110 per day penalty (measured from the date that is 30 days after the request). There is no specific penalty for failure to maintain a plan document, but pursuant to ERISA’s general enforcement provisions, any plan participant can bring a lawsuit to require a plan sponsor to prepare a formal plan document where none exists. Criminal penalties may be levied upon any individual or company that willfully violates Title I of ERISA, which could include these disclosure rules (maximums are $100,000 and ten years in prison or $500,000 for a company). Moreover, failing to maintain an updated plan document and/or SPD may jeopardize an employer’s chance of success in a legal dispute with an employee over benefits.

Solution: Have an SPD and plan document prepared for each plan your company sponsors, and keep the documents up to date. 

5. Failure to recognize deferred compensation.

Many employers do not understand IRC 409A, which generally applies to any arrangement that defers compensation more than 2½ months beyond the end of the year in which the individual first had a vested (legally-enforceable) right to the compensation. A violation of 409A is very costly because it results in taxation of the deferred compensation prematurely (when it is vested, not when it is later paid), along with a 20% penalty and interest.

Solution: Have your deferred-compensation plans, employment contracts and severance-pay arrangements reviewed by an attorney or financial advisor specializing in 409A.

6. Allowing employees to stay on group health coverage beyond the required time period.

Many employers allow employees to stay on group health insurance plans after eligibility would otherwise end under the plan’s terms, without first getting approval from the insurance/stop-loss carrier. For example, employers often allow employees on leave to keep their health insurance beyond the period of time required by the FMLA. If the employee incurs significant medical expense and the insurance/stop loss carrier investigates, the carrier may decline to provide coverage, leaving the employer to “self-insure” the entire cost.

Solution: Offer COBRA coverage to employees that need extended leave but have exhausted or are not eligible for FMLA leave. In this way, employers shield themselves from liability. The employer can continue to pay the employee portion if they desire. Also make sure that insurance/stop-loss carriers are aware of collective bargaining agreements that may apply to coverage issues and have signed off on these agreements in writing. 

7. Independent contractor/temporary employee issues.

Some employers make the mistake of including independent contractors in health plan coverage and/or excluding temporary employees from benefit plan coverage. If an employer allows independent contractors to participate in its health plan, its health plan is technically a “multiple employer” plan, and an IRS Form M-1 needs to be filed annually. Failure to do so can cause the DOL to levy penalties. If the employer has wrongfully excluded “common law employees” from its benefit plans, those “employees” can seek retroactive reinstatement to the employer’s benefit plans, potentially causing large damages to the employer.

Solution: Ask your attorney or financial advisor to assist you if you have never filed a Form M-1 before. To preclude unintentional inclusion of “common law” employees, craft your benefit plan language to specifically exclude individuals not on your payroll. 

8. Misuse of performance evaluations.

Some managers and supervisors make the mistake of not being honest and straightforward when evaluating employees. This mistake often makes it difficult to defend against claims of discrimination and wrongful discharge when managers are less than honest and direct on performance evaluations.

Solution: Do not “sugarcoat” criticisms of employee performance. Not only will you not give the troubled employee an opportunity to correct his or her performance problems and become more productive, but you will also not have an appropriate record of performance deficiencies in the event it becomes necessary to defend a termination or disciplinary action.

9. Contesting unemployment compensation for performance reasons.

State laws may differ, but generally employees who are terminated for performance reasons are entitled to unemployment compensation. Generally, an employee is not entitled to unemployment compensation only if he or she quits or is terminated for misconduct. State laws may differ; check with your legal counsel.

Solution: Understand the standards for misconduct under unemployment compensation law and how they differ from performance-related terminations. Update your employee manuals, making sure the policies are accurate and that you can prove the employee received a copy of the manual. Be sure to carefully and thoroughly document any misconduct and disciplinary issues that have led to an employee’s termination.

10. Recalculating overtime when paying performance-based bonuses.

Employers often forget to recalculate overtime previously paid and make additional overtime payments when paying performance-based bonuses over multiple pay periods. State wage and hour laws differ, but generally if a wage claim is brought, an employer could owe not only back pay, but interest, penalties and attorney fees.

Solution: Check with your legal counsel to make sure you know whether the bonuses you pay qualify for recalculation of overtime. If so, you need to go back and apply the bonus over the relevant pay periods and determine the appropriate overtime rate and whether additional overtime payments are required.

11. Failing to clearly define when commissions are payable.

Many employers make the mistake of not having a written policy defining when commissions are due to employees. State laws differ, but if an employer does not have an appropriate policy, an employee can leave or be fired and still be due thousands of dollars in commission payments.

Solution: Make sure that your commission policy is in writing and clearly defines when employees have earned commissions and how they are handled upon termination.

12. Other common HR mistakes.

• Paying severance without a release. By doing so, you are allowing employees to make future claims.

• Failing to conduct exit interviews. Not only will you gain valuable information to make the workplace more productive, but you may also be alerted to any potential claims.

• Using outdated employment applications. Make sure your applications are consistent with the nuances of your state and local laws (such as ban-the-box) as well as general anti-discrimination laws.

• Failing to comply with the requirements of the Fair Credit Reporting Act (FCRA) when utilizing a third-party to conduct background checks, including various disclosures and notices. Many employers fail to provide the written release and disclosure form as a separate, stand-alone document as is required by the FCRA. Class action lawsuits under the FCRA have risen dramatically in recent years.

• Failing to inform an employee who has complained of harassment of the results of your investigation and remedies and discipline. When an employee complains of harassment, the surest way to invite a complaint with the state or federal government is to not inform the employee about the results of your investigation and any discipline handed out to the alleged harasser. State laws may differ, so it is important to check with your legal counsel.