Businesses that sponsor 401(k) plans are required to run annual compliance tests to ensure that their plan meets the regulatory requirements to maintain their qualified status. In order to run these tests, your Third Party Administrator (TPA) will request certain information from you such as a complete census file. This file includes important information on each employee who received a paycheck from you during the year, regardless of whether or not they are eligible to participate in the plan. Your census information should be compiled and forwarded to your TPA within a month following your plan year-end to ensure that the proper tests are run and any necessary corrections to testing failures are completed timely.
Important information required for each employee:
- Date of birth – This information allows us to verify that all plan participants have met the age requirement of the plan.
- Date of hire – Most employers require their employees to work a certain length of time before participating in the plan. Supplying this data allows us to verify that only eligible employees were allowed to enter the plan.
- Date of termination – Some employers require their employees to be employed on the last day of the year in order to receive the company contribution. By supplying an employee’s termination date, your TPA can ensure that the company contribution is allocated only to those employees who qualify. In addition, supplying termination dates allows your TPA to offer distribution options to former employees or process an involuntary distribution for former employees with small balances.
- Hours – The number of hours worked may be used to determine eligibility to participate in the plan and, in some cases, determine whether or not an employee is entitled to the company contribution.
Of all the information required on the census file, one of the most difficult things to determine is the correct compensation amount to report. There are various definitions of compensation and yours will be defined in your retirement plan’s Adoption Agreement. If you’re not sure what number to report, check your Adoption Agreement or call your TPA for clarification. It is also possible to exclude certain forms of compensation such as fringe benefits or bonuses. If you have exclusions, these will also be identified in your Adoption Agreement. Certain exclusions require additional compliance testing so be sure to report these amounts separately to your TPA so they are aware.
In addition to supplying census data, your TPA will need a complete list of the company owners and their percentage of ownership. The census and ownership information that you submit is critical in determining who is a Highly Compensated Employee (HCE) vs. a non-highly compensated employee (NHCE). Comparing HCE’s to NHCE’s is the basis of compliance (non-discrimination) testing. Failing to properly differentiate between HCE’s and NHCE’s can render your compliance testing results invalid.
Supplying thorough and accurate information on an annual basis allows your TPA to proactively address issues that, if left undiscovered, could have a detrimental impact on your retirement plan and its qualified status. By supplying accurate information, you help to ensure that your plan maintains its qualified status and provides your employees with a low-cost way to save for their future retirement.
Please feel free to contact Heartland Trust Company at 701.235.2002 if you have any questions regarding year-end information requests or anything else related to your retirement plan.
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