January 1st brings anticipation for the future, a fresh start, and a chance to follow through on those New Year’s resolutions. But it also means that it’s retirement-plan reporting season as well. It’s time again to notify your TPA of any business changes that may have occurred in the previous year and provide employee census data for annual testing. Although the information requests from your TPA may seem a bit repetitive and intrusive, there is good reason to answer all questions in detail and fill out employee census requests completely. Missing or incorrect ownership and employee data may affect test results, and inaccurate tests could lead to complicated corrections and possible penalties. Start the New Year knowing that your retirement plan is not at risk in the event of an audit by providing your TPA with the following items:
Compensation – One of the most important pieces of information that your TPA will request is plan year wages (refer to the current plan document or latest amendment for the correct definition of compensation for your plan). The definition of compensation for testing purposes may differ from the definition of compensation for plan contribution purposes. For example, many plans use gross W-2 wages for testing purposes but exclude annual bonus wages from employee deferrals and employer matching contributions. A plan may also exclude compensation prior to plan participation from testing and/or contributions. Any form of post-severance pay that would not have been received had employment continued must be excluded completely for all plan purposes. Your TPA should confirm that the annual census contains the proper definition of compensation, but the plan sponsor is ultimately responsible for providing accurate wage information.
Contributions – Providing correct contribution totals is also essential for accurate test results. As with compensation, there are multiple compliance tests that rely on the employee/employer contribution information to produce accurate test results. The employee deferral contributions and employer contributions (match, profit sharing, etc.) on the annual testing should match annual payroll totals. Your TPA should also confirm that the contribution figures you provide on the census match the actual contributions deposited to the participant accounts.
Personal/Employment Data – Personal and employment data such as date of birth and date of hire are necessary for determining eligibility and plan participation dates. Termination dates help your TPA determine who is eligible for employer contributions, who needs to receive a distribution, and how many eligible participants a plan has at year end. Social Security numbers are used for employee identification purposes and are also necessary for reporting taxable distributions on Form 1099-R as well as other tax-related reporting to the IRS or DOL. In addition, reporting any special types of employees (leased employees, union, non-resident aliens, etc.) assists a TPA with determining who is or is not an eligible plan participant.
Highly Compensated & Key Employees – The ADP (Average Deferral Percentage) test compares the contribution percentages of the highly compensated employees to the non-highly compensated employees to determine if any contribution refunds are required for the highly compensated employees. Identifying who the highly compensated employees are for each plan year is essential for accurate ADP test results, as well as other compliance tests. For the 2014 plan year, any participant who owned more than 5% of the employer business or earned at least $115,000 in 2013 is considered a highly compensated employee for 2014 testing purposes. Employers may also elect the Top-Paid Group condition, which defines highly compensated employees as the top 20% of employees based on pay. In comparison, a key employee is any employee who, at any time during the 2014 plan year met at least one of the following criteria: 1) was an officer of the employer with compensation greater than $170,000; 2) an owner of 5% or more; or 3) owned 1% or more with compensation greater than $150,000. All key and former key employees must be reported on the annual top heavy test.
Mergers/Acquisitions – Any changes in ownership and any mergers or acquisitions during the plan year should be reported to your TPA at least annually, but ideally these types of changes should be reported before they occur. Acquiring new businesses could force an employer to become a controlled group which could require the plan to cover additional employees for plan eligibility, testing, and contributions.
So this year, when your TPA presses you for information, keep in mind that this process is not intended to feel like an interrogation. These requests not only help us to complete the basic annual testing and tax reporting requirements, but they also help us determine if your plan would be at risk during an IRS or DOL audit.
Blog authored by Sara Lewis, Retirement Plan Administrator.