Ask the Advisors: Avoiding Compensation-Related Errors
Q. How do I avoid compensation-related errors in my company’s retirement plan?
Employers who offer employee benefit plan options should be certain that a proper compensation definition is applied when calculating employee deferrals and employer contributions, as it plays a critical role in the plan’s administration. Using an incorrect definition of compensation in your retirement plan can lead to costly operational failures that may impact contributions and benefits, nondiscrimination requirements, the employer’s deduction and more. These factors will subsequently affect your plan’s qualified status. To avoid compensation-related failures, the Internal Revenue Service (IRS) shares these tips:
Review your plan document’s definitions of compensation for each plan purpose.
Use the statutory definition of compensation when required.
Ensure your payroll processor and plan administrator receives accurate compensation data for each employee.
Consider amending your plan to use one definition of compensation for all plan purposes.
Periodically review your plan for errors and fix them as quickly as possible using one of the three correction programs the IRS offers.
Errors also commonly occur when plan administrators do not know each plan’s compensation definition or they are not notified when plans are amended. Be sure your plan administrators are properly trained and are kept up-to-date on changes to the plan’s compensation definition.