What is a Contribution Error?
A contribution error is a type of operational failure that occurs when employee deferrals or employer contributions to your plan are made or not made in the correct amounts or at the correct times, or are attributed to participants in ways that do not comply with your plan document, Guideline policies and procedures, or other applicable laws and regulations.
Such errors can result in negative tax consequences for both the company and the highly compensated employees that participate in your plan. The most common errors occur due to data issues. Whether the data is in Payroll, or manually entered in Guideline such as dates of birth, dates of hire, dates of termination, compensation, ownership percentages, family relationships, etc. Such errors impact Guideline's determination of the group of employees who are eligible to participate and to receive a distribution or loan, as well as our ability to process any applicable nondiscrimination tests each year.
Other errors relate to an employee's failure to timely update his deferral election on the Guideline dashboard, the company’s failure to update the employees elected deferral in payroll, and the company's failure to take the steps necessary to avoid the late deposit of employee deferrals within a reasonable period of time after the end of each payroll period.
How are contribution errors corrected?
The first step in correcting operational errors is to identify the cause of the error. Identifying what caused the error is critical to fixing that error and ensuring that the same error does not continue to occur for future payrolls.
Useful techniques for identifying contribution errors include:
- Identify if a participant was over/underpaid.
- Check payroll deductions against a participant’s deferral rate to ensure the proper deductions were withheld and correctly allocated (pre-tax versus Roth).
- Identify if a participant was eligible to participate and if their withholdings were entered onto payroll.
- Confirm that participant loan repayments were entered in payroll.
- Ensure that re-hired participants were re-entered into the plan according to the plan document.
Contribution errors are fixed through the IRS’ Employee Plans Compliance Resolution System (EPCRS) program. Under EPCRS, some errors may be self-corrected without notifying the IRS, obtaining its approval, or requiring the company to pay any fee or sanction. However, other corrections may require a fee and IRS approval. Learn more about the IRS’ EPCRS program.
What information is needed to fix contribution errors?
Guideline needs accurate payroll reporting to correctly deduct participants’ 401(k) deferrals. If a contribution error occurs, you should request a corrective payroll report, which includes the required adjustments from your payroll provider, and submit the report to Guideline via the Shared Files Folder on your Guideline dashboard for us to process such adjustments.
Below you will find some common operational errors that occur:
- Payroll Reversal
- Elective Deferral Failure
- Prior Provider Corrections
- Lost Earnings Adjustments
- Missed Employer Contributions
- Rehired Employees
- Late Employee Enrollment
- Missed Contribution Collection
What are some other items related to correcting contribution errors?
Contribution errors can result in the plan experiencing lost earnings on late deposits, or require a return of funds to the plan, as described below, although these may also occur with other operational errors.
- Lost Earnings
- Under IRS rules, employee contributions to a 401(k) plan must be deposited into plan accounts as soon as they can reasonably be segregated from the assets of the business assets sponsoring the plan (generally, 7 business days will meet this requirement). Where corrections occur, potential earnings on contributions that should have been timely made to accounts may need to be calculated and paid to the plan.
- Reversal of Funds
- Depending on whether a Mistake of Fact occurred, funds may either need to be returned to your plan or the company bank account on file once a correction has been processed. Requesting a refund of payments made to the plan creates the possibility of jeopardizing a plan’s tax-advantaged status. As such, we generally encourage these funds to be used to offset future plan contributions. If funds do need to be returned where a mistake of fact did not occur, Guideline will move the funds to your plan cash account, which sits within your Guideline plan, and utilize such funds as a credit towards future plan contributions processed. This means that you may see a partial ACH or no ACH from the company bank account on an upcoming payroll, depending on the total contributions being processed and the amount available in the plan cash account
If you have identified that your plan may need a contribution correction, please reach out to the Account Management team for further assistance. For security verification, please include your date of birth and Guideline plan account ID when reaching out. Your Guideline plan account ID is located in the dropdown menu on the top right corner of your administrator account.