A new client’s compliance testing for the past several years improperly excluded several participants who should have been included. Unfortunately, the plan’s service provider failed to explain to this employer that the term “participant” includes individuals who were eligible for the 401(k) plan but who had elected not to make contributions. Thus, when the employer sent data to the service provider so the provider could perform compliance testing, the employer omitted information about those individuals. (The employer reasonably assumed that the service provider would analyze the data received and ask the client for any missing data.)
I worked with the service provider to re-perform the compliance tests at issue, and I reviewed the new calculations performed by that provider. I then filed an application with the IRS to address this issue. After subsequent negotiations with the IRS, the IRS agreed to allow the employer to make certain contributions to the plan. This avoided significant tax penalties for the employer, as well as potential employee benefits litigation.
A new client discovered that it had improperly excluded bonuses from the plan’s definition of “Compensation” for several years. The plan allowed participants to contribute a certain percentage of their “Compensation” and to receive matching contributions of up to 3% of their “Compensation.” Thus, given that bonuses were excluded when calculating plan contributions, participants’ contributions and related matching contributions were lower than they should have been.
I helped the client create a spreadsheet that provided all relevant data and calculations to correct this issue, in accordance with IRS guidance. I also drafted communications to affected individuals, to explain how the issue occurred and what was being done to correct it. In addition, I filed an application with the IRS, which was approved without any negotiation. That IRS approval avoided significant tax penalties for my client.
While reviewing a client’s plan, I discovered that the client had inadvertently excluded part-time employees from the plan. Stated differently, part-time employees had not been informed that they were eligible for the plan. That administrative practice violated the terms of the plan’s governing legal documents.
I worked with my client to gather and review all available and pertinent census information for part-time employees. I then counseled the client about how to perform calculations to make up for these employees’ missed deferrals and missed matching contributions (as well as lost earnings on those amounts), per IRS guidance. I also helped this client determine which IRS correction program applied to this issue. Given the fairly limited scope of this issue, I determined that it was not necessary to file an application with the IRS. Rather, after the corrective contributions were made, I drafted a memorandum for this client’s files to document the issue and its correction. I also drafted a letter to affected individuals, informing them of the issue and the remedial steps my client took to correct it fully.