DATA. Yes, It’s a Four-letter Word. In fact, we hate using it so much that entire departments in companies all over the world went from being called “Data Processing” to “Information Technology”. Our reluctance to use this four-letter word, however, should not cloud the importance of what complete and accurate data can do for your business – especially as it relates to your retirement plan.
There is nothing pension geeks love more than receiving accurate data from their retirement plan sponsor clients. It ranks right up there with world peace, the perfect pocket protector and a comfortable pair of Haggar slacks. But just how important is it that you share correct data with your record-keeper? Let’s look at an example of what can happen with the plan’s non-discrimination testing first.
Little Mistake, Big Consequences
What if the year-end compensation figures you’ve supplied for your company for just one person are off? Let’s say you report $113,000 but the employee actually earned $116,000 in 2013. For all of your 2014 non-discrimination testing, this employee will be erroneously classified as a non-highly compensated employee (NHCE) for the 2014 plan year, when they should be classified as a highly compensated employee (HCE). This could easily lead to one or more failed tests for the 2014 plan year.
The repercussions for failed testing typically involve one of the following two correction methods:
- A return of deferral contributions and/or match (plus earnings for both) to some of the HCE group. This money will be deemed as income to the HCE for the year in which it is returned. As you might imagine, most HCE’s or Key Employees in an organization are the decision makers. None are too happy upon hearing they have to declare additional income for a given year – especially when that income had no withholding for federal taxes.
- Having to fund a qualified non-elective contribution, or a qualified matching contribution to the NHCE group to the extent necessary to pass testing. Trust me when I say this correction method typically isn’t cheap. Depending on the size of your organization, this fix can amount to a 5 or 6 figure contribution……ouch!
What Else Could Go Wrong?
Ok, so that’s testing. Your next question might be…what else can bad data mean for my plan? Take a look at this list and I think you’ll start realizing the importance of what I’m talking about…
- Improper Distributions
- Contribution Errors
- Defaulted Loans
- Correction Fees
- Penalties including Fines levied by the IRS and DOL
- Plan Disqualification
The best way to avoid data errors is to work closely with all parties involved in the administration of your retirement plan. This includes your record-keeper, plan investment advisors and payroll provider. Identify your key personnel in each of these companies that you can count on for quality service. If you handle payroll internally, make sure your staff has the resources they need to provide complete and accurate data to all parties. Make sure the flow of all employee data is not only accurate, but secure as well.
When Uncertain, Ask For Help
Ask your record-keeper about things like on-line and automatic enrollment to improve efficiencies. Utilize website reports provided by your record-keeper to help keep the plan running smoothly. And above all, if something looks out of place or not quite right, pick up the phone and contact one of your partners. The quicker you act, the better off you’ll be. Most plan errors can be self corrected as long as they are discovered within a reasonable amount of time.
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