The key to ensuring compliance with plan document and regulatory requirements is being aware of your plan’s definition of eligible compensation and having appropriate controls in place to ensure benefit calculations use this correct definition. Applying the eligible compensation definition and compensation limits incorrectly can have a significant monetary impact on a plan sponsor.
In situations where incorrect definition of compensation or compensation limits is used, it creates the potential for participants to be denied opportunity to defer the maximum allowable contribution and receive the corresponding employer contribution. This is a violation of plan provisions and requires correction by the employer. The typical penalty for lost opportunity to defer is a Qualified Non Elective Contributions (QNEC) made by the employer on behalf of each affected participant to cover 50% of the lost opportunity to defer and 100% of the employer contribution that would have been due had they been allowed to participate.
Although several payroll service providers offer automatic hot fixes and patches to update the compensation and tax limits, there are others that require a manual process. Even larger providers sometimes require manual installation of these hot fixes and patches by your personnel to make sure the updates are installed correctly.
It is important to review the set up and data tables within your payroll system to ensure that all updates have been accurately completed. Here are some easy ways to check the accuracy of your payroll tables and data:
- Print the updated payroll tables upon installation of year-end fixes or patches and verify the correct compensation limits, deferral limits, and tax limits have been installed.
- Review all earnings codes and match them to your plan’s definition of compensation to make sure all pieces of eligible compensation are properly tagged as applicable for deferrals, match, and profit sharing calculations.
- Spot check initial payrolls in the new year to verify the completeness and accuracy of data used from the tables.
- Note individuals who are likely to maximize their deferral options or have earnings codes that could cause potential issues with plan calculations. As you get closer to year end, monitor reports to ensure contributions are appropriately stopped upon meeting deferral limits.
- Be mindful of catch-up provisions and how they impact contributions for those eligible.
If you discover compliance issues during your review of payroll data, reach out to qualified advisors like the employee benefit plan specialists at Baker Tilly to help work through any issue and take corrective action.