Employee Benefit Plan Audit Series | Incorrect Employee Deferrals

Employee Benefit Plan Audit Series #1 | Incorrect Employee Deferrals – and How to Correct Them

Published on by Dan Holthaus, Jessica Doremus, in Benefit Plan Audits, Video

Can’t watch the video? Get the transcript.

Top employee benefit plan (EBP) audit pros Dan Holthaus and Jessica Doremus dive into one of the most common errors we see in employee benefit plan audits: incorrect employee deferrals. They talk through the top causes – and how to make the corrections.

In the first of our new employee benefit plan audit video series, Dan talks with Jessica about a common issue in employee benefit plans incorrect employee deferrals. They discuss the causes of these errors and the steps that can be taken to correct them.

Dan highlights three main reasons why employee deferrals might not be correct. The first is improper administration of the plan’s auto-enrollment feature, which could affect either a few or a large number of participants.

The second is the incorrect definition of compensation, which is the basis for employee deferrals. If the definition is not correctly calculated, the deferrals would also be wrong. Common issues include the incorrect inclusion or exclusion of bonuses in the setup of payroll.

Rounding out our top 3, the deferral percentage might be incorrect, meaning that employees do not defer as much as they intended to, leading to incorrect withholding.

When these errors occur, the plan sponsor needs to correct them to ensure the participant is in the position they would have been in if the error had not happened. While this might initially seem like a massive financial burden for the plan sponsor, it may not be as daunting as it first appears.

Correcting the error involves three steps: making up 50% of the lost employee deferrals (though safe harbors exist that can reduce this percentage), rectifying 100% of any employer contributions such as a match or profit sharing, and compensating for any lost earnings on both the employee deferral and employer match aspects.

The percentage of lost employee deferrals that need to be compensated can vary depending on the specifics of the situation and the length of the error.

Calculating the missed earnings can be done in two ways, a simpler one and a more complex one. The simpler method involves using the Department of Labor’s lost earnings calculator.

A more complex calculation based on actual plan earnings during the period lost may be required for larger errors. Dan advises consulting with an ERISA attorney to determine the best approach.

Plan sponsors must understand the causes of incorrect employee deferrals and the steps to correct them, ensuring the financial well-being of their employees and the compliance of their employee benefit plans. If you have any questions about employee benefit plans reach out to our employee benefit plan pros. As always, we are here to help. 


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