In our last Correction of the Quarter, we looked at related companies setting up different types of plans for their respective employees and noted that this sort of structure isn’t “necessarily” a problem when it comes to 401(k) plans. Well, as usual, the devil’s in the details, so we thought it was worth diving into what happens when this is a problem.
Topic Archive: Correction of the Quarter
Stop us if you’ve heard this one before – a SEP, a SIMPLE, and a 401(k) walk into a bar…unfortunately, there’s not a great punch line at the end of this one. Instead of some good laughs, this situation is a recipe for some issues in need of attention. While it might be unusual for a single company to establish one of each, it is not nearly as far-fetched to discover that related companies may have setup separate types of plans for their respective employees, one with a SEP or SIMPLE and another with a 401(k) plan. This isn’t necessarily a problem with respect to the 401(k) plan, but the SEP and SIMPLE rules restrict how those types of plans can co-exist with others.
We’ve been through a few Corrections of the Quarter together now, and we appreciate you being along for the ride. We feel this is pretty good stuff but, at the heart of it all, we’re pension geeks (no point in hiding it). And while the rules and regulations get us going, we have a geeky passion for the opportunity to find creative solutions.
While not quite as ominous as a battle with the Night King, dealing with participant loans in retirement plans can be a daunting challenge for plan sponsors. Because of Congress’ concerns about protecting plan assets from improper use by participants and plan sponsors alike, the loan rules are strict and unforgiving.
With all the responsibilities that come with being a plan sponsor, not to mention a business owner, your plan’s forfeiture account probably doesn’t make it anywhere near the top of the priority list. More than likely, forfeitures are allocated to the account automatically by your plan’s recordkeeper following a participant distribution. Then, your plan consultant provides you an annual update of the value of the account when delivering your compliance testing, plan reconciliations, and Form 5500 after year-end. The forfeiture account is just sitting pretty with minimal earnings, readily available for a rainy day. No problem, right?
You probably know that establishing a qualified retirement plan requires the formal adoption of a written, legal plan document. And, if you’ve had a plan in place for any amount of time, you’ve most likely also been required to adopt a handful of mandatory amendments along the way.
While it might not seem like that big of a deal if 401(k) deposits are made a couple days or weeks late, the Department of Labor (DOL) considers those payroll withholdings to be plan money on the deposit deadlines regardless of where the money is physically located. To the extent those monies are still in the plan sponsor’s control, the delayed deposit is treated as a prohibited loan of plan assets to the plan sponsor, which is a very big deal (not in a good way). If that wasn’t motivation enough to fix the delinquency, the fact that late deposits must be reported on the Form 5500 each year until fully corrected (which is like waving a red flag in front of a bull, only the bull here is the DOL) certainly should be motivation to fix it. Pronto!
ABC Company maintains a 401(k) plan that includes the following provisions:
- It operates on a calendar year.
- Compensation is defined as W2 wages with pre-tax deferrals added back and no exclusions.
- Eligible participants can defer up to the IRS limit $18,500 + $6,000 for those age 50 or older (2018 limits, indexed for inflation)
- The company provides a match equal to 100% of the first 5% deferred by each participant, calculated using compensation and deferrals for the full year.
In addition to regular compensation, ABC pays performance-based bonuses at the end of each calendar quarter.
While compiling the year-end census, it was noted that the overall deferral percentages did not appear quite right for certain employees based on their elections. On closer review, it was determined that employees who received quarterly bonuses did not have any 401(k) deferrals withheld from those amounts. With no deferrals withheld, ABC also did not make the corresponding matching contributions.