401(k) Fix It #4
Employer Matching Contributions Weren't Made To All Appropriate Employees
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:
- Review the plan document to determine the correct matching contribution formula and compare it to what you used in operation.
- Review the definition of compensation used to calculate matching contributions.
- Incorrect compensation used to determine elective deferrals normally leads to mistakes in the match.
- Review the timing of the matching contribution in comparison to the plan document requirements.
- If the plan document states the match is a percentage of the deferrals made on a yearly basis and you make matches on a weekly basis, you may have a mistake.
- Be aware of any changes to your plan document
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.
- There are generally no IRS imposed user fees for self-correction.
- Practices and procedures must be in place.
- If the mistakes are significant in the aggregate:
- The employer needs to make a corrective contribution by the end of the second year in which the mistake was made.
- If not corrected by December 31 of the second year, the employer isn't eligible for the Self-Correction Program and must correct under the Voluntary-Correction Program.
- If the mistakes are insignificant in the aggregate, the employer, in most cases can correct beyond the two-year correction period for significant errors. Whether a mistake is insignificant depends on all of the facts and circumstances.
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:
- Be familiar with your plan document’s terms and implement procedures to ensure that your plan operates according to your plan document.
- Work with your plan administrators to ensure that they have sufficient employment and payroll information to calculate the employer matching contribution per the plan document’s terms.
- Identify the payroll services performed in-house, or outside services used, and how payroll is communicated to other in-house staff or outside providers servicing the plan. Identify who's in charge and his or her responsibilities.
- Know how deferrals, loans, Qualified Domestic Relations Orders (QDROs) or other deduction payments are remitted.
- Be familiar with the procedures for how payroll errors are corrected, how corrections are communicated to the plan administrator and how records of corrections are maintained.
Content Library:
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.