Department of Labor (DOL) discovers mistakes before the plan sponsor does.
PLAN KEEP OUT HOW TO
How to correct nondiscrimination test errors.Įmployers face additional jeopardy if the IRS or U.S. "Now you have another problem with a distribution from the plan that is not authorized by the plan document and jeopardizes the overall qualification of the plan," Shankle said. If the employer then uses these wrong results to return additional contributions to ensure that the plan is nondiscriminatory, participants may not receive the correct amounts. If an employer is using the wrong compensation data to conduct nondiscrimination testing, it could end up with incorrect results. To keep its qualified status under IRS rules and the Employee Retirement Income Security Act, a 401(k) plan must pass the actual deferral percentage and actual contribution percentage tests, which compare plan participation rates among HCEs and non-HCEs. For the 2020 plan year, an employee who earns more than $125,000 in 2019 is an HCE. Problems can also snowball when errors occur with 401(k) plan nondiscrimination tests, which ensure plans don't favor highly compensated employees (HCEs) who earn more than an annual cap set by the IRS.
When mistakes happen, "the financial impact can grow exponentially as the resulting problems build over time," said Chris Shankle, managing director with Argent Retirement Plan Advisors in Shreveport, La.
But the calculations can be thrown off by using an employee's total compensation rather than the compensation designated in retirement plan documents, which are usually specific about what compensation can be used and may exclude, for instance, bonus payments. If left unchecked, however, retirement plan mistakes can be costly and inconvenient for both the employer and participating employees.Īn employer's annual matching or profit sharing contributions are usually based on an employee's compensation. Making a mistake does not have to be a calamity-as long as employers and their plan vendors are vigilant and catch problems early. Excluding eligible employees from the plan and enrolling ineligible employees.
Not vesting employees in matching contributions within the required time frame if the plan requires that employees remain at the organization for a length of time before they are vested in their employer's matching contributions.Not depositing participant deferrals or employer-matching contributions into employee accounts in a timely manner or in the correct amounts.Administering 401(k)s and similar retirement plans is complex, and the process offers many opportunities to make mistakes, such as:
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