Match Calculation - Who is responsible?

[katie58]

A client recently changed payroll vendors.   The payroll vendor calculates their match and notifies the client of the funding amount.   During the client's recent audit, it was determined that the Compensation Limit was not capped at $170,000 when determining the match.   The payroll vendor said it was not something they track.   They indicated that the recordkeeper would catch that during the testing process.   So basically the payroll vendor knows that the match is incorrect, but does not feel it is their responsibility to monitor this.  

The recordkeeper  states that they assume that the match calculation is correct, unless they have been told differently.  They indicated they do not test for match accuracy.

I am curious what your thoughts are on this situation.   I always assumed that the party calculating the match would take into consideration the annual compensation limits.

Thanks!

[BG5150]

I would find a new payroll provider AND a new record keeper.

If the match is calculated on a payroll basis, we do not check the accuracy of it when we get the client's numbers.  It's just too difficult to do.  We would need from 24 to 52 (depending on pay periods) separate payrolls with comp, deferrals and deferral %'s/$'s requested by the participants.  We usually just go with the ER's figures, but put in the letter that we are relying on them.

However, we do a reasonableness check.  For example, if the match is dollar-for-dollar up to 4% of pay, anyone over $10,800 in match for 2017 was probably not stopped at the comp limit. 

Some RK's just roll with anything, and I mean ANYTHING, the client gives them and just spit out a report that contains the data.  Very little, if any, analysis is done.

Yet another reason to use a competent TPA (like me!).

If the r/k is not responsible for doing the compliance testing, I don't see why they would vet the data.  Heck, you wanna give Susie McGillicutty $26,431.28 in match?  Sure.  Go ahead.

The payroll vendor SHOULD be able to put in the compensation cap.  They probably know this and forgot, but they are blaming the client for not telling them to do so...

How long has this been going on?

 

[katie58]

5 minutes ago, BG5150 said:

I would find a new payroll provider AND a new record keeper.

If the match is calculated on a payroll basis, we do not check the accuracy of it when we get the client's numbers.  It's just too difficult to do.  We would need from 24 to 52 (depending on pay periods) separate payrolls with comp, deferrals and deferral %'s/$'s requested by the participants.  We usually just go with the ER's figures, but put in the letter that we are relying on them.

However, we do a reasonableness check.  For example, if the match is dollar-for-dollar up to 4% of pay, anyone over $10,800 in match for 2017 was probably not stopped at the comp limit. 

Some RK's just roll with anything, and I mean ANYTHING, the client gives them and just spit out a report that contains the data.  Very little, if any, analysis is done.

Yet another reason to use a competent TPA (like me!).

If the r/k is not responsible for doing the compliance testing, I don't see why they would vet the data.  Heck, you wanna give Susie McGillicutty $26,431.28 in match?  Sure.  Go ahead.

The payroll vendor SHOULD be able to put in the compensation cap.  They probably know this and forgot, but they are blaming the client for not telling them to do so...

How long has this been going on?

 

Unfortunately, this has been going on for several years.

You are correct about the R/K.   They are responsible for compliance testing, but do not vet the data.

The payroll vendor states that they never track this, but could do a manual cap.   The payroll vendor is blaming the R/K.   It just seems like it would be a payroll function.   I can not understand why you set the plan up for a failure every year.  

The R/K is a major player and the payroll vendor is a small start up company.

Thanks very much!

[ESOP Guy]

14 minutes ago, katie58 said:

You are correct about the R/K.   They are responsible for compliance testing, but do not vet the data.

To me being responsible for the compliance testing would include making sure the comp limit was used.  You literally can't do the testing correctly without this.  I get they might not figure out there is a problem until the end of the year but they should have known there was a problem right there.  So after the first year everyone should have been on record there is a problem.  I don't see this can go on for years (plural) and someone is claiming to be doing the compliance testing. 

Like I said above I am more bothered by a RK who claims to be doing compliance testing but doesn't seem to know how to check if the comp limit was used or not.  This isn't vetting the data.  This is knowing enough about the plan and data to see the match formula wasn't working if you apply the comp limit. 

Once the problem was found people could have worked with the payroll company who should be able to handle this basic function. 

[BG5150]

The r/k in its service agreement says: you are responsible for the data you send us, and that's what we are gonna use.  Some places make you (the ER) tell them who the HCE and Key EEs are!  Basically, they are year-end report writers rather than testers.  Only if there is an impediment to processing the data does someone stop the presses (so to speak) and find out why.

I don't blame the r/k.  It's their business model and it's profitable for them. 

Unfortunately, when problems do come to light, it's often been happening for years.

Hopefully, the payroll vendor is now aware of the situation and will take steps to properly calculate the match.  (Which, ironically, some of these payroll/recordkeepers do really well...)

 

[BG5150]

Now, you are going to have to go back and see who was affected and make corrections.  Hopefully it wasn't too many people.

Then you can let them know they should shop around for a good TPA.  I hear BG5150 is pretty good ;)

[Tom Poje]

I don't see any mention of exactly what the match formula is, or if the match is made on a per payroll basis or if the plan has a limit on the match.

but just because someone hits the comp limit during the year(I assume the original note meant 270,000 and not 170,000)   doesn't mean deferrals stop, etc

 

preamble to the final 415 regulations states that:

 

As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year. [Emphasis added.]

Issue 2012-1 (Mar. 20, 2012) of the IRS Employee Plan News offers the same advice:

 

“We're Glad You Asked #2”

We have a 401(k) plan and some employees’ compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee’s matching contribution?

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

[https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf]

[katie58]

12 minutes ago, Tom Poje said:

I don't see any mention of exactly what the match formula is, or if the match is made on a per payroll basis or if the plan has a limit on the match.

but just because someone hits the comp limit during the year(I assume the original note meant 270,000 and not 170,000)   doesn't mean deferrals stop, etc

 

preamble to the final 415 regulations states that:

 

As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year. [Emphasis added.]

Issue 2012-1 (Mar. 20, 2012) of the IRS Employee Plan News offers the same advice:

 

“We're Glad You Asked #2”

We have a 401(k) plan and some employees’ compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee’s matching contribution?

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

ttps://www.irs.gov/pub/irs-tege/epn_2012_1.pdf]

Yes - the salary of $170K was a typo =-)   I did mean 270k

 

[ESOP Guy]

1 hour ago, BG5150 said:

The r/k in its service agreement says: you are responsible for the data you send us, and that's what we are gonna use.  Some places make you (the ER) tell them who the HCE and Key EEs are!  Basically, they are year-end report writers rather than testers. 

Maybe I am being a bit pedantic with my language but if that is true than they aren't responsible for the compliance testing. 

I have seen that business model and understand it.   Than yes you are on your own and you get what you pay for in those situations. 

[CuseFan]

1 hour ago, katie58 said:

I don't see any mention of exactly what the match formula is, or if the match is made on a per payroll basis or if the plan has a limit on the match.

but just because someone hits the comp limit during the year(I assume the original note meant 270,000 and not 170,000)   doesn't mean deferrals stop, etc

So you apply the max match to the max comp and put that dollar limit in the payroll program. This was a simple issue that two parties (payroll and TPA) dropped the ball on (unless TPA does not do testing). Sorry to be harsh, but it's laziness followed by finger pointing and buck passing, has been going on in our industry too long. Common, we're better than this - BG150 says so! It's not like we're the government!

[david rigby]

Answer to the question in the title is: Plan Administrator.

[Pam Shoup]

27 minutes ago, david rigby said:

Answer to the question in the title is: Plan Administrator.

Unless the TPA/RK or the payroll vendor is a plan fiduciary, they have no liability or responsibility for doing anything other than what the Plan Administrator tells them to do.  

 

[Larry Starr]

Sorry, there is no doubt in my mind that the payroll provider is deficient.  If they can't do the comp limit or limit the max 401(k) deferral, they need to replaced with a payroll provider that can. I am not talking about legal responsibility here.  But the error should not happen in the first place, and it is with the payroll provider that the error first happens.  In our operation, we would double check the match against the comp and find this error, and then we would tell the client to change payroll vendors if the vendor can't comply.  Simple.

[Eve Sav]

Payroll company needs to be directed to set an annual $ cap on match (based on formula and comp limit) and use an accumulator in the match field (like they do for the deferral field) . When the $ amount of the match, YTD, hits the limit, then match stops.

It may be up to the Plan Administrator to notify the payroll company what the dollar limit for the  match (depending  on formula and comp limit in effect) each year.

If the record-keeper is ALSO acting as TPA and responsible for the compliance testing, the "over-match" should have been forfeited, and the error should have been identified and fixed,  and prospective procedures put in place.  If the TPA is not limiting the match in testing and identifying these issues, they are not doing their job.      

[CJ Allen]

There's a lot of unknowns here, but I tend to agree with David R & Eve S.  The Plan Administrator has responsibility for making sure the match is set up accurately on the payroll systems.  I've had quite a few "match" issues resolved between sponsors & payroll systems once the sponsor set up a limit on the payroll system.

However, from a compliance testing provider standpoint, even though not responsible for calculating the pay period match, there should be certain reports showing non-compliance with plan or regulatory limits.  In a similar manner to checking for 402(g) limit and compensation limit, an ACP deficiency should be noted by the TPA (qualified TPA like BG5150) for excess dollar amount based on maximum available per 401(a)(17) limits as well as reporting deficiency based on ACP %.  While certain plans may not require ACP testing, there should be reporting available to determine if the % is exceeded.

True-up match after yearend -- provided by the TPA -- would seem to bring to light the negative true-up contributions as well.  Although, that has drawbacks as well.

[thepensionmaven]

Clearly the payroll company must be replaced, sooner rather than later.  What does the plan say about the deposit of company match?

Our plans clearly state the company match be calculated  on W-2 -and not during the year as we do not trust the payroll company to calculate properly; and most do not have a cap built into their systems.

[ARPC]

There are payroll providers out there, that also act as TPA and RK, this may be a more viable option as the mistake is a combination of all parties.

The Plan Administrator should have given the direction to place the salary limit (but they hired a RK/TPA to notify them of this because I am assuming they are not experts in retirement planning and would not necessarily they needed to do this).

The RK/TPA would not be able to accurately perform their duties without due diligence (as mentioned previously) on the match amounts they are given. Assuming they operate primarily on client given data, this can simply be chalked up to "you get what you pay for" many RK/TPAs are chosen for cost alone, yet not all are created equal.

The payroll provider is either incompetent or not knowledgeable. Clearly they would have the capability to implement the Social Security wage limit to prevent tax withholding based on wages, therefore it stands to reason the same standards would be used on the retirement plan to prevent the miscalculation. They simply failed to do so, or did not know they needed to do it.  

The resolution unfortunately may fall to the Plan Administrator (the client) to resolve as the RK/TPA as well as payroll provider may have language in their service agreement that exempts them from performing corrections.