Plan Sponsor Quick Tips: Common Plan Mistakes – Usage of Compensation Definition

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.

Over the next few weeks 401kBasics is going to review the common mistakes that plan sponsors make in administering their plan, how to find the mistake and how to correct the mistake. The third common mistake is failure to use the correct definition of compensation for all deferrals and allocations.

  • How to Find the Mistake: Review the plan document to determine what elements of compensation are included and/or excluded. (For example: bonuses, overtime, allowances…etc.)
  • How to Fix the Mistake: Corrective contribution if the participants account was shorted or a corrective distribution if the account was overfunded. The correction programs available include SCP, VCP and Audit CAP, depending upon the situation.

This mistake can be avoided in the future by performing annual reviews of the compensation definitions and ensuring that the person in charge of determining compensation is properly trained to understand the plan document. For more information please refer to potential mistake number 3 on the IRS 401(k) Fix-It Guide.

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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