January 1st brings anticipation for the future, a fresh start, and a chance to get organized. And for business owners, this includes getting your business organized! Starting with the retirement-plan reporting season. 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 401k compliance 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 retirement 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 be different from the definition of compensation for retirement plan contribution purposes.
For example, many retirement plans use gross W-2 wages for testing purposes but exclude annual bonus wages from employee deferrals and employer matching contributions.
A retirement plan may also exclude compensation prior to plan participation from 401k compliance testing and/or contributions. Any form of post-severance pay that would not have been received if employment had continued must be excluded completely for all retirement plan purposes. Your TPA should confirm that the annual census contains the proper definition of compensation. However, 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 401k 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 401k compliance 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
- How many eligible participants a retirement 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.) helps your TPA determine 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. This helps identify 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. It also aids in completing other 401k compliance tests, such as top-heavy and non-discrimination.
Mergers/Acquisitions – Any changes in ownership and any mergers or acquisitions during the plan year should be reported to your TPA at least annually. Ideally, these types of changes should be reported before they occur.
Acquiring new businesses could force an employer to become a controlled group. This could require the retirement plan to cover additional employees for plan eligibility, testing, and contributions.
So this year, remember the best way to keep your business organized (and help your TPA!) is to provide as much information as possible. These requests not only help us to complete the basic annual 401k compliance testing and tax reporting requirements, but they also help us determine if your retirement plan would be at risk during an IRS or DOL audit.
If you have any questions or are looking for a TPA who asks the right questions to help you stay compliant, do not hesitate to contact us at Watkins Ross. We are here to help!
