Fall 2010 issue of Horizons

4) Failure to comply with the plan’s loan provisions Properly administering participant loans in a retirement plan today is challenging, especially since a plan may have a large number of participants with outstanding loans. Most loan defaults occur because of the participant’s failure to make the required repayments, but there are other issues that cause defaults. The participant is subject to federal and state income taxes (if applicable) in the year of default, and a possible 10% early withdrawal penalty, on the outstanding balance of the loan and any unpaid interest in the event of a default.

or use a prototype or volume submitter plan document. Many mistakes occur because of the changing laws and regulations and the requirements to make sure that the amendment is done both properly and timely. 2) Failure to allocate contributions based on the correct definition of compensation A plan administrator must identify which definition of compensation is used in certain situations in administering a retirement plan. Different definitions may be used to determine: highly compensated employees, the annual addition limit, actual deferral and/or actual contribution percentage test, top heavy test, allocating contributions, etc. A plan can exclude certain items of compensation such as overtime, bonuses, and other types of irregular compensation to allocate participant, employer matching and nonelective contributions 3) Failure to include newly eligible employees or including ineligible employees in the plan An employee must satisfy the plan’s age, service and entry date requirements and be included as part of an eligible class of employees to participate. Some common trends were the identification of employees as independent contractors when they actually were employees or failure to include part- time employees who work at least 1,000 hours during an eligibility computation period. Alternatively, some employees were included in the plan prematurely which may have occurred because of incorrect employee information or operational errors for those plans that use automatic enrollment. if the excluded item does not cause the plan to discriminate in favor of highly compensated employees.

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