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Employers sometimes fail to contribute the employer matching contribution according to the plan document. In many cases, the problem is caused by failing to properly count hours of service or identify plan entry dates for employees. You also may make incorrect contributions when you or the plan service providers fail to follow the plan document terms. Another common problem is using the incorrect definition of compensation from the plan document for determining matching contributions. For example, you or your administrator may not include deferrals in compensation when calculating the matching contribution, but this may be required under the plan document.
Another problem involves the timing of matching contributions. The plan’s terms usually state that employer-matching contributions will be a percentage of participant deferrals, up to a specific level. Plans generally describe these matching contributions in terms of annual amounts and percentages. If your plan administrator calculates the matching contribution on a payroll period basis, rather than on an annual basis, at the end of the year, the sum of these amounts may not comply with the terms of the plan.
How to find the problem:
To avoid mistakes in this area:
How to fix the problem:You should base the correction of an incorrect employer matching contribution on the plan’s terms and other applicable information at the time the mistake was identified.
Correction programs available:
Self-Correction Program:Should a mistake be made, and if its identified as an operational problem because the employer didn’t follow the plan terms and improperly applied the plan’s matching contribution formula, and If the other eligibility requirements of Self-Correction Plan are satisfied, the employer may use the Self-Correction Program to correct the failure.
Voluntary Correction Program:A correction is the same as described under the Self-Correction Program. If the plan is not under audit, the employer would make a Voluntary-Correction Program submission per Revenue Procedure 2019-19 via the Pay.gov website in accordance with the Section 11 instructions. When making the submission, the employer should consider using the model documents set forth in the Form 14568 series (i.e. Form 14568 and custom narrative attachments) to describe the failure and how it’s going to be corrected. User fees for Voluntary-Correction Program submissions are generally based on the amount of plan assets.
Audit Closing Agreement Program:Under the Audit Closing Agreement Program, correction is the same as under Self-Correction Program. The employer and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction. The sanction under Audit Closing Agreement Program is based on facts and circumstances, as discussed in Section 14 of Revenue Procedure 2019-19.
How to avoid the problem or mistake:
Fix It #1: You haven't updated your plan within the last few years to reflect recent law changes.
Fix It #2: You didn't base the plan operations on the terms of the plan document.
Fix It #3: You didn't use the plan definition of compensation correctly for all deferrals and allocations.