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EP Team Audit (EPTA) Program - EPTA Compliance Trends & Tips - 401(k) Plan Trends

In addition to the Common Trends outlined above, 401(k) plans have unique characteristics that impact the operation of these plans and EPTA audits have focused on the following trends, including ADP/ACP failures, matching formula interpretations, and automatic enrollment procedures.

Failure to correct the ADP/ACP nondiscrimination failures under IRC Sections 401(k) and 401(m)

Eighth Highest Failure Reported in Voluntary Correction Program

Fifth Highest Mistake Noted in the 401(k) Fix-It Guide

A significant number of EPTA Plan Audits have shown that large plans are failing to correct ADP and ACP failures on a timely basis.

The following are some of the causes of the failures:

  • If the plan has no limits on HCE deferrals and no matching contributions, examining how the plan meets the ADP test may uncover a process inadequacy.

  • The ADP/ACP percentage calculations are performed incorrectly by Plan Sponsor or vendor.  

  • The ADP/ACP electronic data is faulty.  

  • Testing completed by a third party vendor with no oversight by the employer. 
  • Benefits are provided to a “special” group of participants and not to “all” participants.

  • Newly acquired employees may not have been offered an option to make elective deferrals or may not have been considered for testing purposes.  

  • Eligible non-electing employees are not treated as participants for testing purposes. 

ADP/ACP failures can be mitigated if a Plan Sponsor communicates effectively with its vendors. This includes: 

  • Sharing all data on employee eligibility with vendor; 
  • Providing all controlled group and related employer data to the vendor;

  • Understanding the definition of compensation for testing purposes; 

  • Identifying HCES; and 

  • Once a failure occurs, correct it timely. 

Failure to apply to matching formula properly

Fourth Highest Mistake Noted in the 401(k) Fix-It Guide

  • Calculation of true-up/annualized match

    EPTA audits have revealed that plan sponsors are not interpreting the plan’s match formula in accordance with the plan document. The inclusion or exclusion of a full plan year computation period is a trend that has increased (annualization or true-up). For example, Plan X defines the match computation period as the plan year. Plan Sponsor X contributes its match each payroll period to the plan based on payroll period deferrals. At the end of the year, Sponsor X does not true-up (annualize) the match because Sponsor X did not understand the definition of the computation period as drafted in the Plan X. 

  • Exceeding the maximum percentage permitted under the terms of the plan

    Another matching calculation trend is the failure to observe the maximum percentage permitted under the terms of the plan document. Many plans cap the matching contribution at a set percentage or a set dollar amount. The plan must clearly provide whether the maximum cap is a percentage of compensation or a percentage of deferrals. Some plan sponsors have under matched their participants because they match a portion of the deferral percentage rather than a portion of compensation. 

  • Catch-up application

    Many plan sponsors fail to follow the plan language of whether age 50 and older catch up contributions are matched. Most master and prototype arrangements require the plan sponsor to match employee catch-up contributions. However, plans are permitted to be drafted to exclude catch up contributions in a match calculation. Careful attention must be paid to the terms of the plan to comply with the plan language. 

Plan sponsors must be familiar with the terms of the plan and implement procedures to ensure that the plan operates in accordance with the plan document. Plan sponsors must coordinate with plan administrators to ensure that they have sufficient employment and payroll information to calculate the employer matching contribution described under the terms of the plan document. 

Failure to follow the maximum deferral percentage under the terms of the Plan

Second Highest Mistake Noted in the 401(k) Fix-It Guide

  • EPTA trends have shown that many large employers have percentage limit caps on employee deferrals and employee after tax contributions. Some caps solely impact highly compensated participants. Failure to follow the cap creates ADP/ACP testing failures as well as operational errors in the plan. Computer and payroll systems must be put in place to follow the terms of any deferral percentage ceiling. 

Plan Sponsors must be sure that the provisions of the plan are applied correctly when making a determination of what contributions or benefits will be provided to participants. Plan Sponsors need to develop a communication mechanism to make all relevant parties aware of changes on a timely and accurate basis (best practices), and self audit the plan on an annual basis. 

Failure to follow the terms of the automatic enrollment language under the terms of the Plan and/or PPA '06

A significant increase in the use of automatic enrollment features in 401(k) plans has added more complexity to 401(k) compliance

  • Failure to follow the terms of an automatic contribution arrangement can occur if the participant’s salary is not withheld on a timely basis in accordance with the plan terms and communications provided to the participant. For example, Plan Y provides a 6 month eligibility requirement with monthly entry dates. Participants are provided with a notice 45 days before their eligibility date that their salary will be withheld at 3% on the first entry date coincident with or following 6 months of service unless the participant affirmatively elects another percentage or elects not to contribute at all. The participant reaches eligibility and makes no affirmative election. Five months after the original effective date, Plan Sponsor Y realizes that it has not withheld 3% of the deferrals. 

Under EPCRS, Plan Sponsor Y must contribute 1.5% of compensation to the plan as a QNEC, plus earnings plus any related match. Note that failure to coordinate records and processes with the third party administrator and the payroll department creates plan failures such as this. 

  • Timing of notices

Eligible automatic contribution arrangement (EACA) notices must be provided on a timely basis to permit plan sponsors to offer plan participants a return of deferrals if a participant elects within 90 days after the first deferral under the EACA to have all deferrals (plus earnings) made under the EACA returned to him or her. If the notice is not provided timely the contribution fails to be an EACA and employee contributions must remain in the plan.

  • Automatic increases

Many plan sponsors are automatically annually increasing a participant’s initial deferral. Such increases may be tied to an annual date, an annual review or some other triggering event. Documentation and employee communications must be clearly communicated and coordinated with third party vendors and payroll departments. Failure to follow the terms of an automatic increase could be costly for a plan sponsor. 

  • Rehires

Automatic arrangements must have language in place to deal with participant re-hires. The plan must clearly describe how automatic contribution features impact a rehired participant.

Page Last Reviewed or Updated: 17-Nov-2016