Incorrect Compensation Used - Need Solutions to Fix

[Guest SPollock]

I have a brand new client. I serve as the investment advisor for the 401(k) Plan. They have asked my help with a compliance issue. The plan has been in existence since 1997. In the plan document, compensation is defined as salaries PLUS bonuses, commissions and overtime. The client was under the understanding when they originally set up the plan that bonuses, commissions and overtime were EXCLUDED from the definition of plan compensation. The client has been basing deferrals only on salary and not including bonuses, commissions or overtime since day one. (It is also important to note the plan has a $0.25 match on the 1st 5% of comp.)

One of their non-HCEs who is paid partially by commissions, read the document and determined that she was not receiving the correct deferral. The plan document was amended in June of 2000.

What must the employer do now to correct this compliance problem? Will they need to go through VCAP or some other program? Will the employer be required to make up the missing contributions PLUS match for all affected employees? What options do they have at this point since this has been going on since 1997? (Please note that the employer's original intend was to exclude bonuses, commissions and overtime but the broker who did the original documents did not check the correct boxes.)

[KJohnson]

http://www.benefitslink.com/cgi-bin/qa.cgi...qa_plan_defects

[John A]

Does the document say that deferrals will be based on the defintion of plan compensation? It is possible that "plan compensation" will be used for other issues (such as ADP/ACP testing), but not for deferrals. Read the document carefully.

I am not certain, but I believe it is even okay for a document to be silent as to what compensation is to be used for deferrals. In that case, it is only important for a plan sponsor to be consistent within a year and to use a nondiscriminatory definition of compensation.

Of course, if the document clearly defines what compensation is to be used for deferrals, then you are back to determining corrective measures.