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2018 isn’t over until the data’s scrubbed!

Retirement sponsors know it: while others are ringing in the new year, January is a time for 401(k) plan administrators to assemble, scrutinize and validate prior-year data for plans with a December 31 year-end date. Diligent information scrubbing is important. “Clean” data will result in accurate testing and tax filing. A lack of attention to detail can result in tax-filing errors, the need for voluntary corrections, regulatory audits, and – worst-case – plan repayments, fines and penalties.

Service providers known as Third Party Administrators are the recipients of the data assembled by employer plan sponsors. Using this information, TPAs conduct discrimination tests, identify allowable profit-sharing contributions, complete the IRS Form 5500 for the employer’s signature, and prepare participant communications. The quality of the TPA’s work can depend upon a plan sponsor’s diligence. Additionally, an employer’s workload can be eased by the TPA, so employers will want to question the year-end data collection processes of potential service providers.

Third Party Administrators should provide guidance to employers on the data needed for their 401(k) plan. The following is a general guide to information that may be requested, along with tips to assist with accurate collection and explanations of the data’s importance.

Employee Census Data

Time Period Covered – While there can be exceptions, plan sponsors normally provide census data for individuals employed during the 401(k) plan year. A Third Party Administrator should provide guidance if a plan’s design requires information for another time period.

All Employees – Plan sponsors must provide the TPA with census information for all individuals employed during the time period covered. This includes all employees regardless of whether they became eligible to participate in the 401(k) plan. It also includes all employees who became eligible to participate, even if they chose not to make plan contributions.

All Employment Date Information – Employers must provide significant dates related to employment, including the day employees began work, any termination dates and any re-hire dates.

All Payroll Information – All payroll information – earnings, withholdings and 401(k) elective deferrals should be provided. Earnings include all taxable compensation and each compensation category – regular earnings, bonuses, other special compensation – should be presented separately. This information should be for earnings that were paid during the time period covered, not earned during the time period and paid after the time period ended.

Plan Data

Recordkeeping Information – Optimally, a Third Party Administrator can access plan data maintained by the plan’s Recordkeeper, either because plan administration and recordkeeping are integrated or because the Recordkeeper provides a portal where TPAs can access plan information. Data collected can include financial and investment information as well as participant data: number of eligible participants, eligible participants making contributions, terminated participants and participants who received distributions during the plan year.

Company Data

Operational Information - Third Party Administrators generally ask plan sponsors to verify company data annually. This can include the form of business (corporation, LLC, etc.), the payroll schedule, and the amount of the fidelity or ERISA bond.

Ownership Information – Each year employers need to identify certain company employees meeting IRS definitions. Highly compensated employees are those earning above $120,000 (2018). Key employees are officers earning above $175,000 (2018), those owning more than 5 percent of the company, those owning more than 1 percent of the company with an annual salary above $150,000 (2018), and family members of owners.

Control Groups – Employers need to identify any affiliated organizations or companies owned by the owners of the sponsoring employer along with the percentage of ownership. Employee census information on employees at these companies may also be needed.

Why It’s Important

Complete and accurate information is necessary to ensure there are no discriminatory practices that could invalidate a 401(k) plan. Third Party Administrators use this information to conduct tests that vary depending upon each plan. Testing can confirm that a plan meets coverage tests and does not exclude from eligibility more employees than allowed under ERISA. Plans must also pass Average Deferral Percentage (ADP), Average Contribution Percentage (ACP) and Top Heavy tests, if plans are not “Safe Harbor” plans. These tests can show that highly-compensated and key employees are benefitting within allowable limits when compared to non-highly-compensated employees, or identify corrective actions. TPAs also should check to make sure that employee deferrals did not exceed IRS allowable limits; if so, refunds are necessary.

If a profit-sharing contribution for the just-ended 401(k) plan year will be made, complete data is necessary for the TPA to provide accurate non-discriminatory contribution alternatives for a plan sponsor’s consideration.

Be warned: identifying compensation is an area where many mistakes are made. Plans define compensation differently. Not all plans include bonuses in their definition of compensation. Some plans base employer matches or profit-sharing contributions on compensation paid when an employee is an eligible participant, other plans base these contributions on all compensation paid to an employee.

Written by Laurie C. Wieder, PPC®, Vice President, Alliant Wealth Advisors Qualified Plans Division 


This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.

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