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.
Topic Archive: Plan Correction
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.
Our company sponsors a 401(k) plan. One of our newer employees, Jane Smith, met the eligibility requirements and should have joined the plan on January 1st. Due to an oversight, we forgot to enroll Jane in the plan until she asked about it a couple months later. We assume that we need to make some sort of correction, and we’ve done some online research to figure out next steps. We’ve seen references to missed deferral opportunities and late deferral deposits, but to be honest, it’s all a little confusing.
The IRS did its part to make Friday, April 19th a really good Friday for those who sponsor qualified retirement plans. After not making many friends when it jacked up the user fees for the Voluntary Correction Program (VCP) a year or so ago, the IRS has responded to industry requests (that DWC representatives helped draft) by now allowing plan sponsors to self-correct a number of more common missteps without the need to submit anything to the IRS at all.
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!
Our 401(k) plan allows new employees to make contributions on the first day of the quarter after they work for us for a year. All of our full-time employees have been with us for a long time. Most of our new hires are for short-term projects, so they almost always terminate employment in less than a year and never become eligible for our 401(k) plan. Recently, however, we had two new hires that did stay with us for a year and should have become eligible for the plan. One of them heard about the plan from a co-worker and submitted a deferral election form, but since we are not used to new hires sticking around that long, we overlooked implementing the election. The other never knew about the plan at all.
In order to be eligible for our company’s 401(k) plan, employees must have worked for us for at least a year and be a minimum of 21 years old. They can join the plan on the next January 1st or July 1st following the date they meet those requirements. Recently, we discovered that we allowed an employee to start contributing to the plan before he met those requirements. He also received company matching contributions.