negative true-ups?

[wvbeachgirl]

We wanted to see how other TPAs are handling or would handle the following situation. This is kind of long, so please bear with me. . .

401(k) daily val plan. Plan sponsor’s payroll provider calculates the match on a per payroll basis. Plan sponsor uploads payroll file to our website, we download and process the deferral and match contributions. If the matching contributions are included in the payroll file, our recordkeeping system will buy the match that is on that payroll file – it does not recalculate the match to determine if the match was calculated correctly. So, we get to year-end, and in the process of doing the annual administration and testing discover that the payroll system incorrectly calculated the matching contributions. For those that the payroll system shorted the match, that’s no problem – the plan sponsor will simply deposit the additional contribution due. However, for those that the payroll system overmatched . . . We propose doing negative contributions in the appropriate amount, placing those funds in the suspense account to be used to reduce future matching contributions or to pay plan expenses. Additional items to consider:

- The plan allows only salary deferral and match contributions

- The plan does not provide for forfeiture reallocation

- The match is not discretionary – the formula is for example 100% on the first 5% deferred calculated on a per payroll basis; deferrals exceeding 5% of comp are not matched

- The match is actually allocated to participants’ accounts per payroll

- There are regular “corrections” to payroll files. For example, at the end of the year when the census data is sent to the plan sponsor for verification, it will come back with changes to individual’s compensation (because manual paychecks were issued that did not get included on the payroll files, the payroll file reflected comp that actually wasn’t paid, etc.). This can create a true-up situation as well.

- For some reason, many payroll systems are either unable or unwilling to put the appropriate caps in their system (i.e., the 415 compensation limit, the maximum deferral percentage that will be matched, etc.)

Couple of examples:

1. HCE whose total compensation was $300,000 ($12,500 per payroll) and who deferred $15,500 ($645.83 per payroll) for the year. His deferral % is 5.17%. The plan’s match formula is 100% on the first 5% deferred calculated per payroll. The payroll system calculates a match of $625 on every payroll for a total of $15,000 for the year, neglecting to stop the match when he reaches $11,500 ($230,000 comp limit x 5% = $11,500 maximum match). So at year end this participant has received $3,500 too much in match.

2.NHCE whose total compensation was $50,000 ($2,083.33 per payroll) and who deferred 8% ($166.67 per payroll) or $4,000 for the year. The plan’s match formula is 100% on the first 5% deferred calculated per payroll. The payroll system calculates a match of $4,000 (neglected to limit the match to the first 5% deferred) when the match should have been $2500. So at year end this participant has received $1500 too much in match.

Our position would be that until the administration and testing is done at year end, these allocations are not “final” and that true-ups of this nature are done regularly in the industry (think of daily val custodians who are not TPAs – they process the contributions as provided by the plan sponsor; at the end of the year the TPA determines whether any true-ups/corrections (negative or positive) are needed. The custodian does not receive compensation information, and the TPA may not receive any census data until year end, so neither can determine until year end whether any contributions are in violation of the plan’s formula or the regs). Operationally it would not be feasible to check the calculations on every payroll before that payroll is processed, especially when it is an automated system.

An opinion has been expressed that our proposed method of dealing with this type of situation would ultimately result in an operational defect possibly leading to plan disqualification because the plan is not following (1) the plan document (limiting the match to 5% of compensation) and (2) the regulations (415 compensation limit), and that this would need to be corrected via EPCRS. Additionally, it has been said that there is no mechanism in the regs to allow us to remove these types of excess contributions from a participant’s account (our argument is that failing to remove the excess would result in a failure to follow the plan’s matching formula). Finally, the regulations require that all plan assets be allocated to participants; however, if the plan does not allow forfeiture reallocation and does not have a profit sharing provision and the match is not discretionary, there is no mechanism in the plan to allocate to participants.

We wanted to get a feel for how others in the industry handle this type of situation. Thanks for any feedback.

[Bird]

I'm pretty much ok with your proposed solution. (The idea that accidentally putting too much into someone's account means that you have to go to EPCRS is just dumb.)

The only thing that gives me pause is putting the excess contributions in the suspense account and using it as a slush fund for future contributions and expenses. If all contributions are truly fixed, and not discretionary, then I don't think it's ok to just hold them over from year to year. If you can use them in the same year, fine, but I don't think 2007 deposits can be held and used for 2008 in that scenario. But using them for expenses would be ok, I think, even if it carries over...but I'd accrue them in the year paid.

[Kimberly S]

I'd be looking to find a payroll company that can do it correctly, too.

[HarleyBabe]

I'd be looking to find a payroll company that can do it correctly, too.

To continue this discussion further. What about participants who make in excess of 415 comp for the year but it isn't an equal amount each payroll. They may not exceed the 415 comp or they may. If it is a per payroll match, isn't the match simply what it says, per payroll. How do you possibly take into account the ANNUAL 415 comp limit on something like this?

[Bird]

To continue this discussion further. What about participants who make in excess of 415 comp for the year but it isn't an equal amount each payroll. They may not exceed the 415 comp or they may. If it is a per payroll match, isn't the match simply what it says, per payroll. How do you possibly take into account the ANNUAL 415 comp limit on something like this?

Well, you don't get to exceed the [401(a)(17)] comp limit just because it's hard to keep track of it. That's one of the drawbacks of doing matches on a per payroll basis. The answer is, you either have to improve the system or fix it later.