News & Resources
Retirement Plan Deficiencies: A Look at the Most Common Mistakes – Part 2
Retirement plans must follow the laws and regulations directed from the Internal Revenue Service (IRS) and the Department of Labor (DOL) in order for the sponsoring employer to avoid penalties and receive tax benefits.
Remaining aware of the latest regulations and accurately interpreting plan provisions can be difficult for plan administrators in an ever-changing and highly specialized regulatory environment.
To follow is WK’s second installment of the Top 10 areas in which our third-party administrators see the most common compliance mistakes made by employers.
#1 – The Definition of Compensation:
Click here for the definition and to read Part 1 of the series.
#2 – Eligibility:
An employee’s eligibility date is generally straightforward, but errors often occur when determining the entry date, when an employee is rehired, or if an employee moves from part-time to full-time status. Plan administrators should read and understand the plan document and contact the plan’s third-party administrator with questions to avoid errors or for help with the appropriate corrective procedures. These examples demonstrate some of the most common errors we encounter.
Error: Considering employment status when calculating eligibility (part-time, terminated, etc.).
- In the Coffee Perk 401(k) Plan, employees can enter the plan on the first day of the month after reaching one year of service in which they work at least 1,000 hours, but part-time employees working less than 1,000 hours are excluded. The plan states the first eligibility computation period is the first anniversary year of employment, then switches to the plan year, which follows a calendar year.
- Joey is hired on 2/10/2021 and works 960 hours before terminating on 8/31/2021. He is rehired on 1/5/2022 and works 40 hours his first week back. Even though he was not employed for each of the 12 months within the first computation period (2/10/2021 – 2/9/2022), he did work 1,000 hours during that 12-month period. Therefore, he met eligibility requirements on 2/9/2022, and will have plan contributions for wages paid beginning on 3/1/2022, the next entry date.
- Phoebe is hired as a part-time employee on 1/5/2020, works 480 hours during the first computation period (1/5/2020 – 1/4/2021) and 550 hours during the next computation period (1/1/2021 – 12/31/2021). She switches to full-time status on 3/1/2022 and works more than 1,000 hours in calendar year 2022. Because she had more than 1,000 hours during the computation period (1/1/2022 – 12/31/2022), she met eligibility requirements on 12/31/2022, and will have plan contributions for wages paid beginning on 1/1/2023, the next entry date.
Error: Not enrolling rehired employees properly.
- With few exceptions, employees who were previously eligible for the plan will re-enter the plan on their rehire date.However, depending on circumstances, a rehire can enter the plan immediately, on the next plan entry date, or later if they weren’t previously eligible. Examples of this error follow.
- In The Sign Field 401(k) Plan, employees can enter the plan on the first day of the calendar quarter after reaching three consecutive months of service.
- Elaine is hired on 3/10/2022, satisfied eligibility requirements on 6/10/2022, and was eligible to enter the plan on 7/1/2022, but terminated employment on 6/25/2022 before the plan entry date. When she is rehired on 9/15/2022, she is immediately eligible and will have plan contributions for wages paid beginning on her rehire date of 9/15/2022.
- George is hired on 1/5/2022, satisfied eligibility requirements on 4/5/0022, and was eligible to enter the plan on 7/1/2022, but he terminated employment on 4/15/2022. When he is rehired on 6/5/2022, he will have plan contributions for wages page beginning 7/1/2022, his original entry date.
- Kramer is hired on 2/20/2022 and terminates on 3/10/2022 before reaching eligibility requirements. When he is rehired on 9/25/2022, he will reach eligibility requirements on 12/25/2022 and enter the plan on 1/1/2023.
- Bonus Tip: Participant salary deferral election agreements become void upon termination, so a rehired employee will need to complete a new deferral election.
Error: Using an incorrect entry date.
- In The Cocoa Factory 401(k) Plan, employees can enter the plan on the first day of the month after reaching six consecutive months of service.
- Lucy is hired on 3/2/2022, and Ethel is hired on 4/1/2022. Lucy will have plan contributions for wages paid beginning on 10/1/2022, and Ethel will enter the plan on 11/1/2022.
- In The Monster Factory 401(k) Plan, employees can enter the plan on the first day of the month coinciding with or next following reaching six consecutive months of service.
- Sulley is hired on 3/2/2022, and Mike is hired on 4/1/2022. Both will have plan contributions for wages paid beginning on 10/1/2022.
If you need help interpreting IRS or DOL requirements for benefit plans, WK’s Employee Benefits Plan team provides a hands-on approach to plan administration and compliance monitoring with programs tailored to the individual needs of our clients. To learn more about the newest laws and regulations affecting your retirement plan, please contact a WK advisor.