Each year, you receive the census request from Watkins Ross. The census request provides a way for you to notify your actuary or 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 may seem a bit repetitive and intrusive, there is a 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 year knowing that your retirement plan is not at risk in the event of an audit by providing the following items:
Compensation – One of the most important pieces of information requested 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, in a defined contribution plan, 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 the employee would not have received if employment had continued must be excluded for all plan purposes. As your TPA, we can 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. In a defined contribution plan, the employee deferral contributions and employer contributions (match, profit sharing, etc.) on the annual testing should match annual payroll totals. The contribution figures you provide on the census should 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 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 and other tax-related reporting to the IRS or DOL. In addition, reporting any special types of employees (leased employees, union, non-resident aliens, etc.) assist with determining who is or is not an eligible plan participant.
Highly Compensated & Key Employees – Accurate classification of highly compensated and key employees is critical to provide accurate testing for qualified retirement plans. In a defined contribution plan, 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 2017 plan year, any participant who owned more than 5% of the employer business or earned at least $120,000 in 2016 is considered a highly compensated employee for 2017 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 2017 plan year met at least one of the following criteria: 1) was an officer of the employer with compensation greater than $175,000; 2) an owner of 5% or more; or 3) owned 1% or more with compensation greater than $150,000. The 2017 key employees are used to determine your top-heavy status for the 2018 plan year.
Mergers/Acquisitions – Any changes in ownership and any mergers or acquisitions during the plan year should be reported 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, when your actuary or 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.