Below are some examples of compensation errors in 401(k) plans. If a 401(k) plan sponsor has made compensation errors in their 401(k) plan, the plan sponsor should consult with their 401(k) provider tand ERISA attorney on how to correct the errors.
Example 1
Acme Company adopts a matching formula, and they program their payroll system to calculate the employer match using base compensation excluding overtime and bonuses. Their plan document states that the matching contribution should be based upon total compensation.
• Acme has contributed too little in matching contribution for individuals who had either bonus or overtime pay.
• Acme will have to correct using either SCP or VCP.
• Acme will need to make an additional matching contribution based upon the correct definition of compensation.
Example 2
Acme 401(k) plan provides for a safe harbor basic matching contribution. The plan administrator does not limit compensation to the IRS compensation limit ($245,000 for 2011) in calculating the employer match.
• Anyone who had compensation in excess of $245,000 has received too much employer match.
• The excess employer match will need to be forfeited from the affected participants’ accounts.