Wednesday, December 16, 2009

Compensation - do it right or it will cost you

- By Tobi Cogswell

Compensation is one of the biggest corrective issues we come across on takeover plans. It is so important that the compensation used for testing and allocations is the compensation as defined in the plan document. You may not think this is a big deal, W-2 is W-2, right?

We have seen companies where that is correct, there is nothing extra than wages paid. We have seen companies with 50 elements of compensation, everything from bonuses and commission, to special spot bonuses, to childcare to moving expense. There can be multiple stock options as part of compensation, some may have to be included in compensation used for testing and some may not.

Some plans exclude compensation earned before an employee becomes a participant. Some plans have two entry dates per year and some have four or more entry dates per year.

It is immensely important that you understand compensation as it pertains to your plan. The consequences for using incorrect compensation can be mighty.

$$$$ - to the TPA to go back a particular number of years to check everyone,
$$$$ - to the ERISA attorney to consult and to file a correction with the IRS
$$$$ - to the participants to make up any contributions/deferrals/match missed
$$$$ - to the participants for earnings on those missed contributions
$$$$ - to the IRS potentially if the error was discovered under audit

It is so easy to avoid and so not worth the expense. Take a moment to review your plan document, and before you complete your census package for the year, make sure you are reporting the correct compensation. You will be glad you did.

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