Newsletter by Hawkins Ash CPAs
In this edition
May 2019

Correcting Missed Employee Deferrals

ERISA Record Retention

Proposed Changes to Overtime Rules: How Will This Affect Retirement Plans?
Correcting Missed Employee Deferrals
It’s the end of the plan year and you just discovered some errors were made with respect to employee deferrals — now what? Some people may think the amounts are immaterial and the participant never caught it, so why, as the employer, should you have to correct it?

Plan errors are fairly common whether it be caused by human error, misinterpretation of your Plan document or via a glitch in your payroll software. However, it is important to correct. Plans are subject to potential audits by the Internal Revenue Service (IRS) and the Department of Labor (DOL). Plans could face penalties or potentially lose tax-exempt status if these entities were to find errors that were deemed significant. It is always best to ensure corrections are made when discovered. Errors can be corrected through the Employee Plans Correction Program (EPCRS) of the IRS.

Some of the correction programs available through the IRS are as follows:
  • Self-Correction Program (SCP) — this is for operational issues (such as not following the plan compensation definition of the plan document). This program does not involve any IRS fees and is typically permitted within two years of the error occurring.
  • Voluntary Correction Program (VCP) — corrections are similar to the SCP but also cover demographic errors and plan document failures in addition to operational errors. There is a fee involved based on users and plan asset levels. There are also required reports that need to be filed. The IRS has to then respond on whether or not they will accept the corrections.
  • Audit Closing Agreement Program (CAP) — this is the most expensive of the correction programs and typically results from an IRS audit where errors were significant enough to warrant the plan’s loss of tax-exempt status.

Plans may misinterpret their plan document and miss deducting employee deferrals on compensation that is deemed to be eligible by definition as stated in the plan document (a common example would be PTO payout or a bonus). This type of error causes the employee to end up with more taxable income and a lost earnings opportunity to earn investment income on their deferral.  

In this example the employer would need to make up the following on the employee’s behalf:
  • 50% of the participant’s missed deferral (which could be reduced to 25% or less under certain criterion – there are various guidelines as to how much of the deferral has to be made up based on the circumstances and the time that has passed since the missed deferral). This employer paid amount of the missed deferral is considered a qualified non-elective contribution (QNEC) and goes into the plan from the employer as 100% vested just as the employee deferral would have been.
  • 100% of the corrective employer matching contribution (this would be paid as if the employee had made the full deferral they were entitled to despite the employer only making up a portion of the missed deferral).
  • Any adjustments to a profit-sharing contribution would have to be made as well if applicable based on using an incorrect compensation amount.

The above would all have to be adjusted for lost earnings as well. There is a lost earnings calculator on the DOL website that can be used in this process:  https://www.askebsa.dol.gov/VFCPCalculator/WebCalculator.aspx

In conclusion, it is imperative that plan sponsors fully understand their plan document and have procedures in place to ensure compliance to avoid having to make these types of corrections. However, errors can and do occur, so it is important to work with your third-party administrator to make sure the proper corrections are made and to determine which method is the correct one to follow. Some of the corrections could also affect the year-end compliance testing which could lead to other types of required remedies. If you discover other types of plan errors, you can refer to  https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide for guidance on how to fix it. It is better to fix than to pay potential consequences later.  
Contact: Erica Knerzer, CPA
Direct: 608.793.3113
Email: eknerzer@hawkinsashcpas.com
ERISA Record Retention
Do you know why the question of, “What came first, the chicken or the egg?” continues to be debated after centuries of time? Improper document retention! All (bad) jokes aside though, the Employee Retirement Income Security Act of 1974 (“ERISA”) requires retention of important plan documents and is a serious matter. Complying with ERISA record retention requirements requires being responsible and staying prepared. Failing to do so can get you into a messy situation in the event of an audit.

What Areas Good Document Retention Helps

This is the primary reason for retaining plan documents. Audits require a lot of documentation to prove the plan has been responsibly managed and kept in compliance. A good portion of the documents you are required to retain are those you’ll need to supply for the audit.

Plan Administration
A reliably followed record retention policy allows you to respond to employee documentation requests or changes, deal with audits, and keep the plan compliant. These are all essential aspects of managing employee retirement plans and benefit entitlements. 

ERISA Record Retention Requirements
Under section 107 of ERISA, anyone responsible for filing plan reports must “maintain records to provide sufficient detail to verify, explain, clarify, and check for accuracy and completeness.” In addition, under Section 209 of ERISA, employers should maintain employee records “sufficient to determine the benefits due or which may become due to such employees.” Based on those two sections of ERISA, the next logical question is, “What should be kept?”

401(k) Records that Need to be Kept

Fiduciary Plan Documents
  • Original (signed) 401(k) plan document
  • 401(k) adoption agreement
  • 401(k) plan amendments
  • IRS determination letter
  • ERISA fidelity bond
  • Investment policy statement
  • Trust records/Investment statements

Contracts & Agreements
  • Plan services agreements
  • Annuity contracts and collective bargaining agreements
  • Plan sponsor fee disclosure

Participant Notices
  • 401(k) summary plan description
  • 401(k) summary annual reports
  • Blackout notices
  • QDIA notices
  • Participant fee disclosures
  • Participant introduction packets
  • Proof that the notices were sent 

  • Form 5500
  • Audited Financial Statements

Participant-Level Benefit Determinations
  • Employee demographic information
  • Employee offer letters
  • Proof of compensation
  • 401(k) census data
  • Payroll records
  • Participant account statements detailing contributions, earnings, loans, withdrawals, etc.
  • Participant election forms including:
  • Distribution forms (with spousal consent waivers, if applicable)
  • Loan documents
  • Deferral amount and allocation election forms
  • Beneficiary terms

How Long Do We Need to Keep This Stuff?
Retirement plan records should be kept until all benefits have been paid and enough time has passed that the plan won’t be audited: In other words, close to forever. Retirement plans are designed to be long-term programs for participants to accumulate and receive benefits at retirement. As a result, plan records may cover many years of transactions. The Internal Revenue Code and Income Tax Regulations as well as ERISA require plan sponsors to keep records of these transactions because they may become material in administering pension law. 

If you have questions, please contact us.
Contact: Charles Wendlandt, CPA
Direct: 715.384.1986
Email: cwendlendt@hawkinsashcpas.com
Proposed Changes to Overtime Rules: How Will This Affect Retirement Plans?
In March 2019, the Department of Labor (DOL) released a proposed rule that could change the requirements for paying overtime wages by employers. This legislation would change the salary thresholds for the first time since 2004.

Currently, employees that make $23,660 or less annually ($455 per week) must be paid overtime wages on all hours over 40 hours per week. The proposed rule would change this threshold so employees that make $35,308 or less annually ($679 per week) would be paid overtime wages on all hours over 40 hours per week. 

Effect on Retirement Plans

Retirement plans could be affected in multiple ways if this ruling is passed.

When plans have more eligible employees, there is also an increase in eligible wages which would increase the amount of employee deferrals going into the plan. This is an added benefit for a participant’s retirement account. Likewise, if employers pay matching contributions to plans based on compensation, the amount of the employer contributions into the plans would increase. This would be a direct increase in expense for employers in addition to the increased overtime wages they will be paying. Plan sponsors will want to evaluate the effect of the increased wages on the employer match and adjust the match level if needed as permitted by the Plan document.

Another proposed change in the rule would increase the definition of a “highly compensated employee” (HCE) from someone that earns $100,000 per year to someone that earns $147,414 per year. This would affect the compliance testing that is required to be done by plans annually and could potentially result in increased costs of operating the plans.

Final Thoughts

For now, employers will have to wait and see if the proposed rule released by the Department of Labor will be passed or not. Employers should always be knowledgeable on the eligibility rules of their plans and also the employer contributions that are required to be paid per their Plan documents. Having this knowledge will allow employers to make educated decisions on the operation of their plans based on any new rules that are released.
Contact: Rachel Burrow, CPA
Direct: 608.793.3114
Email: rburrow@hawkinsashcpas.com
More Resources from CPA-HQ
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With some planning, though, your qualified retirement plan doesn’t have to be the target of ERISA litigation. 
Hardship Distributions: What’s New?
A key provision of recent legislation relaxes certain restrictions on hardship withdrawal rules from 401(k) and 403(b) plans.
Podcast: Roth Strategies and Conversions
Although Roth IRAs have been around for 20 years, people still have not used them to their maximum benefit.
Hawkins Ash CPAs
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