To say that 2020 has been a difficult year is an understatement. Chicago businesses faced once in a lifetime circumstances which were almost impossible to predict and even more challenging to endure. For those who made it through the initial shock, the COVID-19 resurgence has again resulted in limiting government orders. As the new year begins, many are taking the time to analyze and review financial and operational performance to establish 2021 projections and goals. For many, this will likely include a focus on continuing business interruption and continuity planning. It is important to also review the company’s benefit plan to ensure proper compliance. To help guide clients, prospects and others, Selden Fox has provided a summary of the top plan errors reported by the Voluntary Correction Program (VCP), as well as those encountered in our audits of benefit plans:
Top Benefit Plan Failures
- Failure to Follow Compensation Definition When Determining Contributions – This happens when the types of compensation used to calculate employee and/or employer contributions does not agree to the definition of compensation in the Plan Document and/or Adoption Agreement. The most common types of compensation that may be misclassified are bonuses, commissions, and overtime. The result is that participants receive account allocations which are more or less than the amount they should have received.
- Delay in Depositing Funds to Plan – This failure occurs when an employer does not remit employee deferrals and loan repayments on a timely basis. Large employee benefit plans with more than 100 participants need to deposit contributions to the Plan as soon as administratively possible, and do not have the seven-business day safe harbor rule that is applicable to small plans. The issue is that participants miss out on investment earnings while the employer held onto these deposits. The correction typically involves calculating and funding the lost earnings for each participant.
- Plan Loan Failures – Most plan loan failures result from the employer’s failure to withhold loan payments. In cases where plan loan payments are not withheld from employee paychecks properly, the loan is considered to be in default and the participant is taxed on the outstanding amount in the year of default.
- Failure to Include Eligible Employees in the Plan – The IRS reports that this failure most commonly occurs in a controlled group situation after a merger or acquisition. When an employee is improperly excluded from the plan, they are unable to contribute to the plan, and miss out on investment earnings and employer contributions to which they may be entitled. Typically, the correction involves making corrective contributions to resolve the matter.
- Failure to Satisfy Limits of IRC 415 – The law limits the number of contributions a participant can receive in a 401(k) plan or can be accrued in a defined benefit plan. This failure occurs when the employer does not monitor the number of contributions/benefits accrued by participants.
- Failure to Provide Minimum Top-Heavy Benefits – For most plan types the law requires if the account balances of key employees (such as owners or executives) comprise more than 60% of plan assets, non-key employees should also receive a minimum benefit or contribution. Compliance testing performed by a third-party administrator typically can identify this type of failure during year-end testing.
- Required Minimum Distribution (RMD) Failures – Participants are required to take a mandatory distribution when they reach a certain age (waived in 2020 due to the pandemic). This failure results when the plan does not make the necessary distributions as required. Unfortunately for the participant, they will be required to pay a 50% tax on the distribution amount if it is not made on a timely basis.
If you have questions about the information outlined above or need assistance with your 2020 benefit plan audit, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.