Problem #3 (cont): Maximum compensation limit

A common compensation error in 401(k) plans is not applying the maximum compensation limit of IRC401(a)(17). Of course, there is no limit on the compensation that can be paid to an employee, but thereis a limit on the amount of compensation that can be considered for 401(k) purposes. At no time can a [Read more…]

Problem #3(cont): Examples

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. [Read more…]

Problem #3 Incorrect Definition of Compensation

The third error identified in the IRS 401(k) Fix-It Guide is using the incorrect definition of compensation. Every 401(k) plan document defines compensation for 401(k) purposes, and in some cases the 401(k) plan document defines multiple definitions of compensation for different purposes. For example, [Read more…]

Problem #2 (cont): Examples

Below are some examples of operational 401(k) errors. If a 401(k) plan sponsor is aware of an operational error, the plan sponsor should work with their 401(k) TPA or 401(k) provider to resolve the situation. In many cases, it is also necessary to engage an ERISA attorney.

Example 1
XYZ Company’s 401(k) plan document says that Division A employees shall be excluded from the 401(k) Plan. XYZ Company allows ten Division A employees to participate in the 401(k) plan because they are management employees.

• XYZ will have to amend their plan to retroactively include these employees. Such an amendment would need to be nondiscriminatory.
• In the alternative, the XYZ Company 401(k) plan can forfeit the account balances for the Division A Employees.

Example 2
A participant in the ACME 401(k) plan has total contributions to the Acme 401(k) plan in the amount of $59,000 for 2010. The Section 415 annual additions limit is $49,000. His elective deferrals were $16,500, the employer match was $8,000, and the employer profit sharing contribution was $34,500. The excess amount is $10,000. The participant is under the age of 50.

• The plan document says that all allocations must be limited to the IRC 415 limit.
• The plan document says that profit sharing contributions are reduced first. The excess amount will need to be forfeited along with any investment earnings or losses. The excess amount does not revert back to the employer, but rather is transferred to the forfeiture account.

Example 3
The XYZ Plan has a three year cliff vesting schedule. A participant who is 0% vested is paid as if he is 100% vested resulting in an overpayment from the XYZ Plan of $2,500.

• The plan must make efforts to have the $2,500 restored to the plan. If the participant will not return the money, the employer needs to make the plan whole by contributing the amount to the plan resulting in a windfall to the participant.
• The plan must notify the participant that the $2,500 is not eligible for rollover.

Problem #2 (cont): General correction principles

IRS Revenue Procedure 2008-50 includes general correction principles and some specific guidance for plans to use when a plan is correcting an operational error due to failing to apply a plan’s terms. The most fundamental correction principle for correcting operational failures is to try to put the plan back in the place it would have been had there not been an operational failure. In many cases (but not all), this principle gives us a pretty [Read more…]

Problem #2 (cont): SCP vs.VCP

If an employer has failed to operate a plan according to its provisions, the plan must be corrected. Assuming the employer finds the error before the IRS, the employer can file under VCP. Additionally, under some circumstances the employer can self-correct the error without a formal filing. While employers are often initially drawn to self-correction, not all operational issues qualify for self-correction, and in some cases more correction options are available under VCP. [Read more…]

Problem #2: Failure to operate the plan according to its terms

ERISA and the IRC require that a plan have a written plan document that includes the plan provisions such as the eligibility, contribution amounts, distribution provisions, etc. Additionally, the plan document includes certain IRS provisions like age 70 ½ distributions. Plan documents explicitly provide all major plan terms, and it is generally unnecessary to establish a lot of administrative provisions interpreting or clarifying the plan’s [Read more…]

Problem #1 (cont): Examples

Below are some examples of plan document errors. If a 401(k) plan sponsor has a plan document error, the plan sponsor should work with their 401(k) TPA or 401(k) provider to resolve the situation. In many cases, it is also necessary to engage an ERISA attorney. [Read more…]

Problem #1(cont): Missed amendments and restatements

If an employer realizes that they failed to sign a required amendment or restatement, the employer’s best course of action is to promptly file a VCP application with the IRS. The IRS does not provide for self-correction of plan document failures. For many plan document failures, the IRS allows plan sponsors to do a streamlined filing which generally reduces the professional fees associated with preparing the filing. Additionally, the IRS’s turnaround time on streamlined filings is pretty quick. The IRS VCP fee associated with a plan document failure depends on the type of failure and when the failure is corrected. The starting point is the general IRS VCP fee in Rev. Proc. 2008-50, which depends on the number of [Read more…]

Problem #1 (cont): Signing the Plan Document

It sounds easy. It does not seem like the kind of thing that anyone would mess up. It only takes a few minutes. But, experience tells us that people somehow get it wrong all the time. What simple task are we talking about? Signing 401(k) plan documents! Here are Nova 401(k) Associates’ tips to help with this seemingly simple task and make sure that you keep your plan document up to date. [Read more…]