Retirement plan advisers can add value to their relationships with clients by understanding IRS plan testing, experts say. “The rules are incredibly complicated,” says Robyn Credico, defined contribution (DC) consulting leader, North America, at Willis Towers Watson. “Because tests
are sometimes only done once every three years, sponsors can pretty easily make a mistake.”
And there are common mistakes sponsors make that advisers can bring their attention to and help them avoid, experts say
“The most common mistake I see in plan administration testing is following the definition of compensation,” says David Joffe, a self-employed ERISA [Employee Retirement Income Security Act] attorney at David A. Joffe, Esq.
“It is helpful if an adviser goes through that definition word for word, in terms of each element of compensation,” Joffe says. “Companies have different ways of defining compensation and coding it. It is also helpful to get a person from the payroll provider involved
“Next is eligibility and ensuring that those who are eligible to participate in the plan are, in fact, given that access,” Joffe continues. “That can include automatic enrollment, or not automatically enrolling participants when they should be. Enrolling appropriately according to the plan document is very important. Employers need to understand how eligibility terms work.”
Another common error, he says, is applying the IRS required limits on contributions. “Sponsors need to know those limits, particularly as they change annually,” Joffe says
Sponsors sometimes can find through plan testing that they’re not properly administering hardship withdrawals and loans from the plan, he says, and they should watch out for that
Yet another misstep that Carol Buckmann, ERISA attorney and co-founder of Cohen & Buckmann, has found sponsors make is not realizing that they need to include workers from related companies or affiliates in their control group. Sponsors also sometimes mistakenly segregate highly compensated employees (HCEs) into one control group and non-HCEs into another control group, Buckmann says.
While she agrees with Credico that the testing rules are complicated, Buckmann maintains that “advisers don’t need to understand all of the technical tax rules or the testing rules, but, rather, simply make their plan sponsor clients aware of the common mistakes to avoid.
Plans often fail non-discrimination testing, she notes. “Advisers can help them avoid that by helping them implement automatic enrollment or making the plan a safe harbor plan through company matches, or simply by educating workers on the value of a retirement plan to boost participation,” she says. “These are just some ways advisers can avoid the plan having to return money to HCEs.”
Yet another way plans can avoid failing nondiscrimination testing is by offering HCEs nonqualified deferred compensation plans, says Matt Compton, director of retirement services at Brio Benefit Consulting.
Advisers can also help plan sponsors gather all the necessary data and fill out the recordkeeper’s annual census request, Credico says. Benefits consultants and some ERISA attorneys can also assist their sponsors as they prepare for such tests, she says. Smaller plans are more likely to turn to their third-party administrators (TPAs) for help.
lf a mistake is uncovered by IRS plan testing, advisers can help plan sponsors use the IRS’ Employee Plans Compliance Resolution System (EPCRS) to rectify it, Joffe says.