For Defined Contribution retirement plans with plan years ending December 31st, the conclusion of the following March 15th deadline traditionally represents an ideal time to identify and correct any errors conducted by Plan Sponsors or Third-Party Administrators that might have occurred during the previous plan year. The application of a variety of complex and ever-changing rules on a daily basis can present a significant challenge to individuals charged with the responsibility of overseeing the daily needs of retirement plan participants. While the number of errors that can occur during a plan year is extensive, there are certain mistakes that are relatively commonplace. The following list identifies some of the most common errors that occur within the daily or annual operation of defined contribution retirement plans:
Not Incorporating the Annual Compensation Limit
A common error committed by Plan Sponsors is ignoring the annual compensation limit for plan participants when calculating annual employer contributions. For 2012, the compensation limit used to calculate employer contributions was $250,000. Many times, Plan Sponsors will forget to cap the compensation and use all income earned for certain highly-compensated employees. This causes excessive employer contributions and, ultimately, the need for corrective forfeitures. The annual compensation limit has been increased to $255,000 for 2013.
Misjudging the Relationship Between Service Requirements and Entry Dates
Another recurring error exists when Plan Sponsors allow employees to participate in 401(k) plans before their eligibility date. While it is important to focus on the required amount of service time that needs to be completed by each employee, it is equally important to remember that employees completing the plan’s service requirement cannot participate until they reach the subsequent entry date. The entry date is specifically identified within the plan document and represents the date, following the required amount of service, that employees can officially begin participating in the plan. This miscalculation often leads employees to begin participating in the plan days, weeks or even months before their true eligibility date, and will result in the need for corrective distributions and possibly forfeitures of employer contributions.
Not Following Rules Listed in Plan Document
Perhaps the most problematic issue facing 401(k) Plans occurs when Plan Sponsors simply do not follow all rules outlined in the underlying Plan Document. Often times, turnover or inexperience within payroll or human resources departments can result in misinterpretation of complex 401(k) rules, thus resulting in a myriad of necessary corrective measures. It is critical for employers to make sure that the individuals responsible for the day-to-day operation of their 401(k) plans to be well-versed in rules outlined within their plan documents.
Schneider Downs Wealth Management Advisors is proud to employ a team of retirement plan specialists who are ready to help any Plan Sponsor looking to improve or enhance their 401(k) Plans. Please contact Karl W. Kunkle (412-697-5401) or Jeff Acheson (614-586-7259) for any retirement plan need.
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