Definition of compensation errors are the most common plan error that we see on audit and can be the most costly to correct. The corrections can be very time consuming and can require guidance from ERISA counsel and/or approval from the IRS through the Voluntary Correction Program (VCP). In general, definition of compensation errors occur when certain compensation amounts are improperly included or excluded in practice and this does not align with the plan document provisions.
Examples of common errors
- The plan document includes bonuses as eligible plan compensation, but certain bonuses were improperly excluded in practice.
- Manual or off cycle payroll runs were excluded in practice.
- The plan document excludes post severance vacation payout, but vacation payout for those that were not terminated was excluded as well in practice.
- The plan document excludes overtime and bonus, but overtime and bonus were improperly included in practice.
- In practice regular earnings from the last paycheck of terminated employees was excluded even though the participants made no election to stop contributing.
- Group Term Life (GTL) is excluded in practice, but the plan document states that eligible compensation is W-2 wages.
What can cause an error?
- New personnel that are unaware of the plan provisions.
- A new plan amendment that changes the definition of compensation unintentionally.
- Personnel unaware of new plan amendments that change the definition of compensation.
- New compensation codes are not correctly set up in payroll.
How to prevent errors
- The main thing to remember is that the plan document drives what types of compensation should be included as eligible plan compensation. It is important to gain a thorough understanding of your plan document.
- If you make any amendments to the plan document, ensure that you are aware of the impact it will have on eligible plan compensation.
- Encourage all those involved in managing the plan and setting up compensation codes in payroll to review the plan document and refer back to the document as necessary.
- Review of eligible plan compensation compared to the plan document should be part of the payroll review process.
- Reach out to third parties with any questions.
What to do if you discover an error
Reach out to your auditor or third party provider as soon as you discover the error. Early detection of an error can significantly reduce the cost of the correction if proper measures are taken. There are many factors that go into a correction. It is best to consult a professional when making corrections.