Find the Mistake
Fix the Mistake
Avoid the Mistake
|4) Employer matching contributions weren't made to all appropriate employees.||Review the plan document to determine the employee eligibility requirements and matching contribution formula and compare it to what's used in operation.||Apply reasonable correction method that would put affected participants in the same position they would've been in if matching contributions were made to eligible employees in accordance with plan terms.||Contact plan administrators to ensure that they have adequate employment and payroll records to make calculations.|
Employers sometimes fail to contribute the employer matching contribution according to the plan document. In many cases, the problem is caused by failing to properly count hours of service or identify plan entry dates for employees. You also may make incorrect contributions when you or the plan service providers fail to follow the plan document terms. Another common problem is using the incorrect definition of compensation from the plan document for determining matching contributions. For example, you or your administrator may not include deferrals in compensation when calculating the matching contribution, but this may be required under the plan document.
Another problem involves the timing of matching contributions. The plan’s terms usually state that employer-matching contributions will be a percentage of participant deferrals, up to a specific level. Plans generally describe these matching contributions in terms of annual amounts and percentages. If your plan administrator calculates the matching contribution on a payroll period basis, rather than on an annual basis, at the end of the year, the sum of these amounts may not comply with the terms of the plan.
How to find the mistake:
To avoid mistakes in this area:
- Review the plan document to determine the correct matching contribution formula and compare it to what you used in operation.
- Review the definition of compensation used to calculate matching contributions.
- Incorrect compensation used to determine elective deferrals normally leads to mistakes in the match.
- Review the timing of the matching contribution in comparison to the plan document requirements.
- If the plan document states the match is a percentage of the deferrals made on a yearly basis and you make matches on a weekly basis, you may have a mistake.
- Be aware of any changes to your plan document.
How to fix the mistake:
You should base correction of an incorrect employer matching contribution on the plan’s terms and other applicable information at the time of the mistake.
Employer D sponsors a calendar-year 401(k) plan with 20 participants and plan assets that don’t exceed $500,000. The plan document provides that D will make matching contributions equal to 50% of the amount deferred by the participant for the year up to 6% of compensation. A participant deferring 6% of compensation should have a matching contribution of 3% of compensation.
During the 2014-plan year, D erroneously computed its match based on 50% of the amount deferred by Carla for the year up to 3% of compensation instead of 6% of compensation. Carla received $50,000 in compensation and elected an 8% deferral rate ($50,000 x 8% = $4,000 elective deferrals). Employer D provided a matching contribution to Carla totaling $750 ($50,000 x 3% x 50%). Under the plan terms, Carla was entitled to a $1,500 match ($50,000 x 6% x 50%). As a result, Employer D needs to make a corrective contribution of $750 plus earnings for Carla.
Correction programs available:
The example illustrates an operational problem because the employer didn’t follow the plan terms and improperly applied the plan’s matching contribution formula. If the other eligibility requirements of SCP are satisfied, Employer D may use SCP to correct the failure.
- No IRS imposed user fees for self-correction.
- Practices and procedures must be in place.
- If the mistakes are significant in the aggregate:
- Employer D needs to make a corrective contribution by December 31, 2016.
- If not corrected by December 31, 2016, Employer D isn't eligible for SCP and must correct under VCP.
- If the mistakes are insignificant in the aggregate, Employer D can correct beyond the two-year correction period for significant errors. Whether a mistake is insignificant depends on all facts and circumstances.
Voluntary Correction Program:
Correction is the same as described under SCP. If the plan is not under audit, Employer D makes a VCP submission. Employer D's plan had assets that do not exceed $500,000, so the user fee for the VCP submission made in 2019 is $1,500. When making the submission, D should consider using the model documents set forth in the Form 14568 series. The fee is higher if plan assets exceed $500,000. VCP user fees may change in subsequent years.
Audit Closing Agreement Program:
Under Audit CAP, correction is the same as under SCP. Employer D and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction. The sanction under Audit CAP is based on facts and circumstances, as discussed in Section 14 of Revenue Procedure 2018-52.
How to avoid the mistake:
- Be familiar with your plan document’s terms and implement procedures to ensure that your plan operates according to your plan document.
- Work with your plan administrators to ensure that they have sufficient employment and payroll information to calculate the employer matching contribution per the plan document’s terms.
- Identify payroll services performed in-house, or outside services used, and how payroll is communicated to other in-house staff or outside providers servicing the plan. Identify who's in charge and his or her responsibilities.
- Know how deferrals, loans, QDROs or other deduction payments are remitted.
- Be familiar with the procedures for how payroll errors are corrected, how corrections are communicated to the plan administrator and how records of corrections are maintained.