I hate the feeling in the pit of my stomach when I realize that I’ve made a mistake; especially if it might be expensive to fix it. If you are responsible for the administration of your company’s Retirement Plan, chances are a mistake will be made during the course of the Plan’s existence. Here at Benefit Resources we’ve been administering Plans since 1987, so we’ve helped a lot of companies fix their Retirement Plans. Here we have outlined some of the common Plan problems, and how to fix them.
Your Plan document will identify when an employee becomes eligible for your Plan. Some Plans may allow for immediate eligibility. Elective deferrals to a 403(b) Plan, for example must be offered to most employees immediately. You can have up to a one-year waiting period for 401(k) elective deferrals, and for employer contributions to a Defined Contribution or a Defined Benefit Plan that are subject to a vesting schedule. Your Plan may require up to a two-year waiting period for employer contributions to a Defined Contribution of Defined Benefit Plan that will be vested immediately.
Problem: You fail to offer an employee the opportunity to make elective deferrals (401(k) or 403(b)) once they became eligible for the Plan.
Fix: The Company must make a contribution to the employee’s Plan account equal to one-half of the average contribution rate for all employees, plus interest. Any employer contributions that are missed must also be deposited to the employees Plan account plus interest.
For example: Jonathan was eligible for the Zebra Corp. 401(k) Plan in August 2012. He was not offered the opportunity to enroll until January 2013. The average deferral for Zebra Corp. 401(k) participants in 2012 was 6% of pay. Zebra Corp. would be required to contribute 3% of Jonathan’s pay from August 2012 through December 2012 plus interest on that contribution based on the DOL interest rate calculator.
Problem: Your Plan has an automatic enrollment feature where employees are entered into the plan at a specific date after employment even without completing enrollment forms. You identify at a later point in time that the employee’s paycheck was not adjusted and deposits were not made for him or her when they should have started.
Fix: The correction for this situation is the same as the example shown above – the company must make a contribution equal to 50% of the average elective deferral for the employee(s) that was not automatically enrolled at the correct time. Any matching contribution that would have been available during that time must also be made.
After an employee has met the eligibility requirements prescribed by the Plan, he or she can then begin participation in the Plan as of the Entry Date identified in the Plan document. Entry dates may be any one of the following:
- Retroactive to the beginning of the Plan year in which the requirements are met
- Upon the date the eligibility requirements are met
- The first of the month, or the quarter following the date on which the requirements are met
- Semi-annual entry following the date on which the requirements are met.
- First day of the Plan year (allowed only if eligibility period is 6-months or less)
Problem: An employee is allowed to begin participation in the plan prior to his or her entry date.
Fix: There are two possible remedies for making this Plan mistake:
- Amend the plan under the Employee Plans Compliance Resolution System (EPCRS) to allow that particular employee to enter the Plan prior to his or her entry date.
- Forfeit the contributions made by the employee, and restore the funds to him or her through payroll. The forfeiture is allocated or used as described in your Plan document.
View part 2 of the Common Retirment Plan Problems Series. (Compensation and Coverage.)
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