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EP Compliance Trends and Tips - Compliance Activities - Applicable Issues - The Employee Contributions

This section involves issues surrounding salary reductions/deferrals made by employees. Several trends are found with these arrangements.

Notification to Make Elective Deferrals
Let’s start with an issue right up front - SIMPLE IRA plan examinations find that sponsors are not notifying eligible employees that they can begin to elect to make salary deferrals. It is very important to give employees proper notification when they are eligible to begin using this feature in the plan.

Exceeding Annual Dollar Limitations
In The Employer Contributions section, a trend was found regarding employer contributions exceeding Internal Revenue Code limitations. The same trend is found with elective deferrals. Administrators need to be aware of the current year limitations imposed on these types of contributions and inform employees when they have reached the limitation for that particular year.

Improper Deductions
Examinations of 401(k) plans found a trend with employers who are improperly claiming a deduction on their current year federal income tax return for 401(k) deferrals made on account of and paid during, the subsequent tax year. Not only is this prohibited, but it is also an abusive transaction. An abusive transaction mainly means that one is obtaining tax benefits not allowed by law. The Internal Revenue Service sees this as a significant violation and currently has examination efforts in place to unwind all abusive transactions in plans.

Other Trends
Finally, SARSEP examinations have found two trends that are generally exclusive to that type of plan. One, examinations have found that plans that had more than 25 eligible employees at any time during the prior year are still accepting deferrals in the current year. Employers cannot accept deferrals when this occurs. Second, examinations are finding less than 50% of all eligible employees are not electing to make deferrals to the plan in any year. In these instances, all deferrals in that year are disallowed.  It is the job of the administrator to ensure this rule is met.

Page Last Reviewed or Updated: 30-Sep-2013