Retirement plans have become a fixture at most companies because they provide employees with an opportunity to save for their future. While there are many types of retirement plans available, most companies elect to offer a 401k plan. This plan type is quite popular because it allows employees to invest pre-tax (and sometimes post-tax) dollars to fund their retirement. In addition, many companies offer an employer match program and / or profit sharing contribution designed to incentivize employee participation. While these plans offer significant benefits to participants they can also be challenging for plan sponsors to manage. There are a myriad of rules and regulations concerning the administration and operations of these plans coming from both the Internal Revenue Service (IRS) and Department of Labor (DOL), covering such topics as deferrals, reporting, and several other areas. It’s no surprise that from time to time mistakes are made that can cause a plan to be non-compliant. To help clients, prospects, and others understand these mistakes and how to correct them, Wilson Lewis has provided a summary below.
Resolving Common Plan Errors
- Eligible Employees Excluded from Making Contributions – From time to time. eligible employees are accidentally excluded from making contributions. If you suspect this could be happening in your plan it’s essential to review the plan documents to ensure those who are eligible can make contributions. Check with plan administrators to ensure employees are entering the plan at the allowed time. To resolve this situation, it’s important to make a qualified nonelective contribution in amounts accepted by the DOL for impacted employee(s) that compensates for the missed deferral opportunity.
- Definition of Compensation Errors – It’s not uncommon for a plan sponsor to misinterpret the definition of compensation as defined in the plan documents. Remember that most plans define compensation as wages and salaries, fees for professional services, commission, tips, fringe benefits and bonuses, but care should be taken to ensure all forms of compensation as defined in the plan documents are included in the calculation of deferrals and match / profit-sharing contributions. If this mistake has happened, it’s important to review the plan’s definition of compensation used for determining elective deferrals, matching contributions, etc. Once an issue has been identified, make a corrective contribution, reallocation or distribution, as allowed by the DOL to resolve the issue. A best practice to prevent such issues is to regularly review compensation definitions to ensure they are properly followed.
- Plan Failed Nondiscrimination Tests – This happens when contributions made to highly compensated employees (HCE) are not proportionate to contributions made to non-highly compensated employees (NCHE). If this happens with your plan, the first step is to review employee classification to ensure employees are properly classified as HCE or NHCE. If the classification is correct and the test failure stands, then correct the problem by making qualified non-elective contributions to NCHE. This will remove the discriminatory transaction and bring the plan back into compliance.
- Non-timely Deposit of Deferrals – This occurs when the plan sponsor takes longer than is permitted to deposit employee deferrals into the plan trust. If this occurs with your plan, determine the earliest date that deferrals can be segregated from general assets. Compare that date with the actual deposit dates to determine the tardiness of deposits. This error is generally fixed by depositing all elective deferrals withheld and related earnings into the plan’s trust. In addition, plan sponsors generally need to participate in the DOL Voluntary Fiduciary Correction Program to resolve the issue. This problem can be avoided by conducting regular reviews of the timing of deferral deposits to ensure they follow plan documents. The pattern of deposits should be relatively consistent from pay period to pay period.
Contact Us
It’s clear there are many situations which can lead to non-compliance for plan administrators. The IRS and DOL offer various self-correction and other programs which allow a plan to return to compliance. If you believe there has been an error made in administering your plan or would like assistance with your 401k plan audit, Wilson Lewis can help. For additional information please call 770-476-1004, or click here to contact us. We look forward to speaking with you soon.