Common Errors in Qualified Plans: It's Time for Spring Cleaning!
I have come to realize that "As time marches on" -- so do the errors in our client's retirement plans. So, with "spring cleaning" in the air, I decided to clean out the garage of plan errors and list, in no particular order, some of the errors that have occurred over the past year. The type of error might not be new -- but the resulting consequences clearly explain the often used phrase -- "No Good Deed Goes Unpunished."
I encourage you to do your own self-cleaning and feel free to add to my list. Here are 5 of my favorites for the year. As I continue to clean I will post more and I encourage you to do the same:
1. A. Error: Distributions of large single-sum amounts to retirees that were never eligible to participate (and therefore never accrued a benefit) under the defined benefit plan.
B. Correction: Rather than try to amend the plan retroactively to include the affected group (that was valued at 25 million), we opted to take the IRS approved approach – ask for the money back. Well, 20 claims later and potential lawsuits pending we find ourselves looking at the TPA who, on its own accord, made the distributions in error.
2. A. Error: Failure to make payments on individual plan loans.
B. Correction: Following the IRS guidance, repayment was requested in the manner outlined in EPCRS. I am always amazed to find that no matter how long the "loan payment holiday" was – in this case – up to 3 years, affected participants are still surprised that they owe the money on the original loan. In the future the client is giving serious consideration to putting on the loan document "THIS IS NOT A GIFT."
3. A. Error: Improper vesting applied – some people were credited with too much vesting service – others had too little credited.
B. Correction: Adjust years of service according to the actual years of employment with 1000 hours or more. Sounds easy – try it some time – I dare you. With new payroll software and the ability to do manual overrides; adjusted service dates; adjusted DOH; adjusted DOT; customized coding; etc. – it's next to impossible to replicate employee's exact tenure at a large company. In my practice – the more sophisticated the payroll process, the harder it is to recreate the past.
We have opted to use assumptions (our way of applying rough justice) and have the issue pending with the IRS for approval in the VCP.
4. A. Error: Improper deferral based on wrong definition of compensation was used.
B. Correction: Adjust prior deferrals based on the correct use of compensation. Again – not rocket science. In fact, this error is noted by IRS as the most recurring in their VCP program. The issue that I have found to be the most difficult is when a large client has so many pay codes and the language in the plan document (defining pensionable earnings) is so vague – that nobody really knows what type of compensation is eligible and what is not. Frankly, this begs the question – how does the employer know that the wrong definition of compensation was used in the first place? When I presented that to the employer – the response I got was – "You know it when you see it!" It's time – once again – for the litigators.
5. A. Error: Improper application of the benefits formula under a defined benefit plan. Resulted in participants receiving excess benefits.
B. Correction: We decided to cure the error in 2 stages. First we asked for the excess to be returned. If it is returned we decided to gross-up the employee outside of the plan from corporate assets. If it is not returned we contributed the excess amount into the plan's trust. Second, we discovered that the error occurred based on the actuarial firm's independent interpretation of the benefit formula. It was shocking to the client that the actuary, on his own, decided to interpret the formula in such a manner that was inconsistent with the plain meaning of the written plan document. Needless to say, the actuarial firm paid for the correction, including the filing fee and attorneys' fees. It's good to have a signed, updated vendor agreement.