October 17, 2018
Authored by: Meredith Jacobowitz and Lisa Van Fleet
Welcome to the third installment of this series! This week, we are discussing the five most common compliance mistakes made by 401(k) plan administrators and fiduciaries, the potential liability associated with such mistakes, and steps you can take to avoid making them yourself. Each day we will discuss a new compliance mistake. So far, we have discussed failures to timely update plan documents and an SPD’s failure to accurately describe plan terms. Today we discuss a plan’s definition of compensation.
Wrong Definition of Compensation
401(k) plans may use different definitions of compensation for different purposes. For instance, plans may use any definition of compensation for certain purposes, but must use one of two statutory definitions of compensation found in the Internal Revenue Code (“IRC”) for certain other purposes. For example, (i) the IRC § 415 definition of compensation must be used when calculating the employer’s deduction for contributions and determining which employees are considered highly compensated, and (ii) the IRC § 414 definition of compensation must be used for safe harbor plans and for determining if a plan meets nondiscrimination requirements. An operational failure occurs when the administrator uses a definition of compensation other than the definition specified in the plan documents. Even if the definition used for the calculation is legally permissible, the definition must match the definition contained in the plan’s terms.
If the error is discovered by the plan sponsor, it may generally be corrected as described below.