401k Compliance Issue (True Up Calc Dispute…)

[Guest 4o1kAdm1n]

Hello,

Looking for some help here- this is somewhat long, but want to cover all the details. This is a question in regards to 401k compliance (True Up Calculations). I am my company’s 401k Plan Administrator and this is my first year in this role. In addition to this role I have about 20 other jobs I do, so this isn’t my primary purpose at my firm, (which is probably why I really need some help!!) Also, if anyone thinks they can help, but needs more general information on this situation, please ask. (Obviously with respect to confidentiality of company and employees).

Got my plan’s trueup for 2011 back and they say we underfunded one employee. This employee came from an affiliated company in Aug 2011 and as per our plan, wasn’t eligible to contribute to plan until 3 months after hire. Employee contributed from Oct to Dec 2011. Trueup says we owe him match for the 3 months he was ineligible because our adoption Agreement has a box checked for “No Exclusions” for Plan Compensation. However, our Plan Summary (distributed to all employees) clearly states you can’t get a match unless contributing and can’t contribute until 3 months after hire. The company that provides our 401k is not budging on saying we owe, because of their interpretation of the Adoption Agreement, but if the employee did not contribute, he can’t receive a match. Obviously going forward, our Adoption Agreement needs to change to prevent this from occurring again, but I can’t seem to figure out how to avoid getting hit for this. The 401k provider says we can just not pay it and risk IRS audit, but I don’t see how this can hold up. The adoption agreement contradicts itself on several occasions and the wording is very vague. Our provider is not much help, as they are not open to hearing anything other than what they want to hear. If anyone has a link to something that can help me out, it would be greatly appreciated. I already looked on IRS website for 401k and it isn’t much help, in the sense that it doesn’t cover something as specific as this. Even if I have to give in to the provider, I want proof saying there is no other way.

Believe me, its not about the employee getting the extra money, its just the fact that my employer is not going to be thrilled with this situation; also, the simple fact that they are saying, “Ok your plan says this, but we say this, so give us money. By the way, we could have explained this to you when you completed the Adoption Agreement, but we figured it would be lots of fun to jam you up with compliance issues that we can’t really even back up!!”

My role as 401k Admin is a small part of the multitude of roles I have at my company and I was sort of “thrown into it”. My vast experience in Compliance consists of me passing the Series 63 in 2008 and never using any of it again! The person before me was employed for the sole purpose of payroll/401k admin, so I can’t spend hours upon hours researching this to prove the provider wrong, nor should I have to. Not really sure why this is so complicated. We cut the provider a check for holding our plan assets, but yet I don't see the benefit bc we are doing all the legwork. Forgive me for being cynical, I just think that the situation is ludicrous; this is also not the first time I have had to butt heads with them. We’ve had employees come during the plan year and not contribute for 3 months and we weren’t hit for this before. I think someone on the other side is wrong, but I need help proving them. Someone please point me in the right direction, as this has been an ongoing fight for 2 months!! Thank you in advance!!

[ESOP Guy]

I will admit I am getting more and more rusty on 401(k)s as I do just ESOPs any more. But I used to work on 401(k)s alot.

My first thought is to have you check your prototype document under the definition of Compensation. It will tell you if you compensation is measure for the whole plan year or from date of entry into the plan in the year someone enters the plan. If it is from date of entry into the plan I think you will have a much stronger case. I won't say if it is full year comp your position is wrong, but I think this is an important plan provision. I think the really good 401(k) people on this board will want to know the answer to my question to feel comfortable answering you questions.

[GMK]

our Plan Summary (distributed to all employees) clearly states you can’t get a match unless contributing and can’t contribute until 3 months after hire.

We’ve had employees come during the plan year and not contribute for 3 months and we weren’t hit for this before.

FWIW, what I'd look into are:

1. As you know, the adoption agreement and plan document trump the SPD. If the SPD is wrong (which depends on the details in the plan doc/agreement), fix it.

2. Were the others who came during the plan year also from an affiliated company? Does the plan doc have different eligibility for employees coming from an affiliate or otherwise treat them differently?

[pmacduff]

my thought was also the fact that this employee was from an affiliate. Is it possible that coming from the affiliate the employee should have been in immediately? Without seeing your actual Plan Doc, it's difficult to diagnose...

As others have mentioned I would also check the definition of compensation in the Plan Doc as it relates to match and if it is defined as "participation compensation" or plan year compensation or some other definition.

Your 401k provider certainly should give more information than simply that they are telling you this is required.

If not - once this issue is resolved you might want to seriously considering changing providers.

good luck and let us know how it turns out!

[GMK]

Your 401k provider certainly should give more information than simply that they are telling you this is required.

If not - once this issue is resolved you might want to seriously considering changing providers.

I'll second that.

[K2retire]

Definitely check on the affiliated company issue. That may be a big part of the equation.

You are correct that a match cannot be made unless the employee deferred. But timing may be the issue and there are multiple ways that can happen.

If, for example, the employee did not defer for the entire period that they were eligible, or they changed their deferral percentage during the year, the amount that you calculated based on each individual pay period may not be correct when considered on the basis of the portion of the year they were eligible.

What is your match formula? If it is limited to a percentage of pay that is lower than the percent the participant deferred, that will impact the calculation.

Or if the person was really eligible immediately because the affiliated company rules, but you only allowed him to defer for 3 months, the match would be compared to his deferrals and his compensation from his correct plan entry date and you might even need to make an additional contribution to make up for the 3 month delay.

Does your document require a true up, or is it optional?