EMPLOYEE BENEFIT PLAN RESOURCES
Newsletter by Hawkins Ash CPAs
In this Edition
November 2020

Considering a Change to Your TPA? Here’s What You Need to Know.

Definition of Plan Compensation

The Year-End Plan Census
Considering a Change to Your TPA? Here’s What You Need to Know.

There are many reasons why a plan sponsor may want to change its third party administrator (TPA). Perhaps the fees are too high, or the TPA is making errors. Maybe your contact person is always changing because of high turnover or you’re just not happy with the amount or type of communication you are receiving. Perhaps the TPA is mostly reactive and rarely offers any proactive suggestions. In any event, there are several important considerations when deciding if it’s time to change your TPA. 

Determine what authority is required to make the change. Do you need a board resolution to terminate contracts with your current TPA or to enter into contracts with your new TPA? You should also determine how you will go about searching for your new TPA. Does your organization have established RFP processes? 

Figure out what you want. Before you start looking for a new TPA, your organization should determine what services are considered important to you. If there will be a change to the responsibilities (either you are taking on more responsibilities or you’re shifting more things to the new TPA) a transition plan should be established. Make sure these services fit your plan’s needs before making decisions or signing service agreements.

Participant access and options. Determine how the change in TPA affects your employees’ access to their accounts. What changes will there be to contribution and distribution processing? What about web access? Will there be significant changes to your participants’ investment options?

Your plan’s participants will have blackout dates. Once you begin the process of making the change there will be a period of time where the plan’s participants won’t be able to make any contributions, distributions, or changes to their investment elections. This “lets the dust settle” before the actual asset transfer takes place to help ensure that all the assets are accounted for properly. Your participants must be notified of this blackout period, as well as the change of TPA, the effective date of the change, and the new contact information. 

Did your current TPA provide your plan document? If you are using a plan document from your current TPA’s volume submitter plan, you may be required to change your plan document by your new TPA or they may charge additional fees if you want to keep using the old one. If you do change your plan document, be sure it fits the way you run your plan. A small change to the definition of compensation can result in a big corrective contribution if the new definition of compensation is not followed. 

Are your records complete? The responsibility of maintaining the plan’s records rests with the plan sponsor, and your new TPA will need complete records to undertake the administration of your plan. Once the current TPA is terminated they have no duty to provide your new TPA with any records and oftentimes will charge additional fees for records transfers. Before terminating your current TPA make sure you identify which records will need to be transferred and in what format. You must work with both TPA firms to ensure your plan data is moved correctly and completely. 

Much of this transition will be governed by your service agreement with your current TPA, and every TPA will react differently to being terminated. Having a plan makes your transition much smoother and ensures there are no gaps in oversight or compliance.
brad knowles

Contact: Bradley Knowles, CPA
Direct: 715.387.1131
Email: bknowles@hawkinsashcpas.com
Definition of Plan Compensation

Interpreting the definition of plan compensation can be frustrating. Each year the IRS and Department of Labor (DOL) reports that one of the biggest mistakes employers make is using the wrong definition of plan compensation. To help avoid this mistake, employers should consult with their Third Party Administrator (TPA). Having a knowledgeable TPA can help employers understand this area of retirement plans and provide confidence that the correct definition of compensation is being followed.

Simplifying the Definition
Many times employers get confused by what constitutes the “correct” definition of compensation. This can be fixed by simplifying the definition of compensation for their retirement plan. A standard definition of compensation is Form W-2 wages. This consists of an employee’s Box 1 W-2 wages, excluding any non-taxable fringe benefits, reimbursements from an accountable plan, worker’s compensation, and similar items. By simplifying the definition, not only will it make it easier on those who process payroll and deferrals, it will also lessen the chance of misreporting plan compensation because less items need to be coded in the payroll software.

Different Definitions for Employer Matching Deferrals
The plan document should clearly state all definitions of compensation, including the compensation to be used for matching deferrals. If the plan follows a calendar year and a participant becomes eligible to participate on July 1, the plan document should explain how an employer matching deferral is calculated. One plan may state that the employee’s compensation for the entire plan year is eligible for an employer matching deferral while another may choose to only include the employee’s compensation from July 1 through December 31. No matter what you choose for your retirement plan, make sure the plan document specifies what compensation is to be included for any employer matching deferrals.

Bonuses, Commissions, and Quarterly Incentives
Another common mistake is not including certain types of compensation in the total “eligible” compensation for all deferrals. Bonuses, commissions, and quarterly incentives are several examples of compensation that may not occur during every pay period, and employers may want to exclude these items from being deferred on. However, unless the plan specifically states that they are to be “excluded,” they need to be included in compensation. Misreporting compensation can lead to large penalties and the plan could lose its IRS qualified status. Additionally, this could result in a large number of missed deferrals which could slow the growth of an employee’s retirement account. 

Avoiding Mistakes
To help mitigate these common mistakes, the employer needs to fully understand the definition of plan compensation and clearly state their intentions in the plan document. In addition, the employer should create a governing committee for the retirement plan. This committee should meet at least annually with the Human Resources department to make sure that any changes made are clearly stated and understood. Any changes made should be given to all employees so they are made aware of them. Finally, it is important to review the plan document, adoption agreement, and any plan amendments to ensure they align with the employer’s intentions for the plan. Don’t let a box being “checked” or “unchecked” cause you to incur unnecessary costs, potential penalties, and possibly cause the plan to lose its qualified status. 

Contact: Marcus Klemm
Direct: 715.748.2856
Email: mklemm@hawkinsashcpas.com
The Year-End Plan Census

When you’ve reached the end of the Plan year, among other administrative tasks, it is time to compile the census. Assuming the Plan has been operating according to the Plan document throughout the year, the next step is to organize your information. Whether the Plan Sponsor prepares the census or a third party administrator organizes it on the sponsor’s behalf, it is important to review and verify that the census is complete and accurate. The following paragraphs will describe why the census is important, common problems we observe as auditors, and steps the plan sponsor can perform to take responsibility for it.

Why is it important?
Data contained in the census is used for annual compliance testing required by both the IRS and Department of Labor. This analysis is essential to make sure the Plan remains qualified. The testing will identify any corrective actions needed in order for the Plan to comply with the provisions affecting it. Errors in the census could result in testing inaccuracies and lead to additional testing and corrective action. Issues that go uncovered could affect the Plan’s tax-exempt status. The census is also used by the Plan’s auditor. A smooth audit process starts with a strong census.

What are common deficiencies to look for?
The information contained in the year-end census should cover the entire plan year, not just as of a point of time during the year. It should also include all employees with wages paid during the Plan year. This means that even if an employee is not employed at the end of the year, not yet eligible for participation, or not making deferrals, they should still be on the census if they received compensation. Although the format of the census and categories of data requested varies by Plan, ensure the census is complete and includes all of the required information.

How to ensure accuracy?
One way to identify potential issues in the census is to reconcile the compensation reported on the census to internal year-end payroll records or the W-3. This is a good check to determine if there are people missing. Keep in mind that only payrolls with pay dates that fall within your Plan year should be included. For example, for a December Plan year end, you would not include the payroll on the census that is paid in January even though the dates worked were in December. It is also recommended that the employee and employer deferral amounts be reconciled to contribution records. Demographic data such as birth dates, hire dates, and termination dates should also be reviewed for accuracy by comparing the information to employee files.

Please contact a member of the Hawkins Ash CPAs employee benefit plan team if you have any questions or need assistance regarding this topic.

Contact: Erica Knerzer, CPA
Direct: 608.793.3113
Email: eknerzer@hawkinsashcpas.com
More Resources from CPA-HQ
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