PLANSPONSOR - August/September 2019 - 62

ERISA EXAMINATION
'Compensation'
As a Plan Term
What sponsors include, or exclude, can lead to big problems
W
e have written in the past about the importance of
understanding and following a retirement plan's
terms. Failure to do so, even if the outcome is favorable
to participants, constitutes an operational error. This can
result in serious issues-plan disqualification or penalties, for
instance-as well as a breach of fiduciary duties. For these reasons,
it's important to do periodic compliance checks to be sure
the plan's terms are followed properly.
Types of Compensation
One of the most important plan terms is " compensation. " What
the plan includes or excludes in compensation, for plan purposes,
is probably one of the most common sources of errors we see.
And for good reason. The plan's definition(s) for different types of
contributions are often less than a model of clarity.
Compensation can be defined in various ways. But most
definitions start with a base definition and modify from there.
In tracking Internal Revenue Code (IRC) testing safe harbors,
this base definition is often either W-2 wages or W-2 wages
subject to withholding. Great! This is information needed for
tax filing purposes and should be readily identifiable. But not so
fast. There are generally exceptions to the base definition. First,
plans may add back amounts that are deducted pre-tax for 401(k)plan,
IRC Section 125-plan-i.e., to pay for health or welfare
benefits-or similar purposes. Depending on the plan, compensation
that a worker earns before becoming eligible to join may
be included or excluded. Plus, special rules apply if the payment
is made post-severance. On top of that, plan sponsors often elect
to exclude certain other types of compensation, such as fringe
benefits, deferred compensation, etc. While the sponsor may
have reasons to exclude some types of compensation, it's important
to remember that the more exclusions that apply, the more
likely an error will occur.
Often, plans provide for a matching contribution on a payperiod
basis, but then want to apply a true-up for employees who
change their deferral percentage during the year. This means you
look at the compensation for the pay period to do the initial match
but then at compensation for the whole year when determining if
a true-up is appropriate.
Some plans have different definitions of compensation
for different purposes. For example, the compensation used for
calculating employee deferrals may be different than what is used
to calculate employer profit-sharing contributions. To further
complicate matters, many employers have a wide variety of pay
codes they apply for different types of pay. We've seen employers
with hundreds of different pay codes! Each pay code should be
considered from a plan perspective-this means ensuring it is
properly flagged as " excluded " or " included " for plan contribution
purposes. Unfortunately, the payroll department is often separate
from the benefits department. If the individuals in these departments
aren't communicating when new pay codes are added or
when the plan's definition of compensation is revised-well, let's
just say, " Houston, we have a problem. "
To further complicate
matters, many employers
have a wide variety of
pay codes they apply for
different types of pay.
Compensation Reviews
Doing periodic compensation reviews can help solve this problem.
These involve looking at each pay code, understanding what type
of compensation it represents and then comparing that against the
plan's definition of compensation for each type of contribution:
Should it be included or excluded for each purpose? Additionally,
having the payroll and benefits departments coordinate with
each other if changes are made either to the plan's definition of
compensation or to the pay codes can help prevent the issue.
If a compensation review reveals that some has been improperly
excluded or included, the next step is to correct the error.
The Employee Plans Compliance Resolution System (EPCRS)
provides plan sponsors with guidance as to how to fix operational
errors. Generally, this means making corrective contributions or
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PLANSPONSOR - August/September 2019

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