PLANSPONSOR - November - December 2023 - 37

correctly, she recommends. " Taking a little
bit of time to have those conversations is
leveraging those resources upfront to avoid
having issues down the line. "
Failure to include all eligible
employees. If a sponsor catches this error
within three months of when an employee
should have been notified of participation
eligibility, the employer can rectify it
by enrolling the person and making her
whole on the employer contribution that
was missed, Swets says. If the sponsor
takes more than three months but less
than two years to fix it, the penalty gets
steeper: The employer must make the
employee whole on the company's contribution
plus pay 25% of the amount the
employee would have contributed in the
missed period. Beyond two years,
the
employer has to pay the missed employer
contribution plus 50% of the missed
employee contribution.
A sponsor can avoid this error by
having a process in place on the front end,
Swets says. " You could pull the reporting
from your recordkeeper once a month, to
make sure what's in your payroll system
[on newly eligible employees] aligns with
what's in the recordkeeper's system, " she
says. " So, if an eligible employee wasn't
offered enrollment, you'll find it, early. "
Incorrect compensation definition
used in contribution calculations.
If a plan sponsor determines that an
employee made excess elective deferrals
because an incorrect definition of
compensation was used in calculating
the deferral amount, the IRS says the
plan must give the participant a distribution
of the excess deferrals, plus earnings
on those deferrals, if applicable.
If
the
sponsor
determines
an
employee had less earnings withheld
than what should have been withheld
if the correct compensation definition
was used, then the sponsor has created a
missed deferral opportunity. As with any
missed deferral opportunity, this means
the sponsor must make up any missed
employer contributions and potentially a
portion of the employee's deferrals that
would have been made under the correct
definition, Swets says.
" First of all, you can avoid this
problem by understanding your plan
document's definition of compensation, "
Droblyen says. " Then, go to your payroll
company and ask, 'Are you basing a participant's
deferral amount on the definition
of compensation in our plan document?' "
Loan administration not handled
properly. An employee with a loan
outstanding could go on leave, for
example, and the payroll system suspends
to some [highly compensated] participants
are needed, approve them quickly. "
If a plan does corrective distributions of
excess contributions within two-and-ahalf
months of the end of its plan year, the
employer escapes paying an excise tax.
" If it's corrected later than that, there's a
[10%] excise tax for the employer on the
excess contributions, " he notes.
Swets suggests that sponsors pay
attention to data on highly compensated
employees' deferral
seeing a significant
trends.
" ... realistically, much of the
language in the plan documents
is unfamiliar to plan sponsors,
especially in small plans. "
loan repayment but neglects to restart it
when the employee returns. Typically,
participants have a couple of options if
they are behind due to a payroll error,
Swets says: They can make a balloon
payment to bring their arrears up to date,
or they can re-amortize the loan over the
time remaining until the original maturity
date. A further option combines the
two: making a partial payment and then
re-amortizing the rest of the balance over
the original maturity period, she says.
To prevent this error from occurring,
Swets suggests utilizing 360-degree
payroll integration, if the plan's recordkeeper
offers it. That circumvents human
error. " Beyond that, for the plan sponsor,
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