Failure to include all eligible employees
Top 10 retirement plan internal control pitfalls #4
How do companies and institutions avoid excluding eligible employees from their plans? The answers are somewhat similar to the automatic enrollment process, but it depends on when the fix occurs.
It’s important to remember that the employee will always receive 100 percent of any missed match, without exception. There is a reduced required correction contribution, however: If the error is fixed within three months, there is no corrective contribution for missed deferral opportunity. If fixed after three months, a 25 percent corrective contribution is required. If fixed after the last day of the second year following the plan year in which the error occurred, the corrective contribution increases to 50 percent. For example, if an error occurred in March 2017, and the employer failed to fix it in 2017, 2018 and 2019, it would not be until 2020 that the 50 percent correction contribution would be required.
There has been a concerted focus by the IRS to get plan sponsors to fix errors, so they have made it a lot easier than it was in the past. They are not as concerned about why the error occurred—or how it is going to be fixed—but what will be done to avoid such an error in the future.