Government Testing & Filings
Just in Time
A client had a Stock Acquisition. The assets of the prior plan were brought into the plan that RPCSI services. The prior plan's provider did not file a Final IRS Form 5500. RPCSI noticed this lack of filing and provided a Final IRS Form 5500 prior to the filing deadline, thus avoiding any IRS late-filing penalties.
We took over the plan at the beginning of 2020 to help the client determine if they should become Safe Harbor or not, we requested their 2018 ADP/ACP testing to review and see how much money was returned to the Highly Compensated Employees (HCEs) due to failed testing. In reviewing the testing, we discovered 2 errors on the test which had a negative impact and caused the 2018 testing to be incorrect. There was 1 individual listed as an HCE, who was not an owner, and whose compensation was well below the HCE compensation limit so we confirmed if their wage in 2017 was sufficient enough to make them an HCE in 2018 and it was determined that the wage was not at the HCE limit and thus that individual was inaccurately reported as an HCE and used for the test in that group. Additionally, we discovered an individual who was listed as an “otherwise excludable” participant and was in a separate test. The otherwise excludable group is only available when a plan’s eligibility is something less than a 1 year wait, age 21 and semi-annual entry dates. This plan used these exact parameters for eligibility so there should not be any participants in an ”otherwise excludable” group. So, with just a glance at the test we determined it was incorrect and that a new test needed to be run, and corrective action needed to be taken to ensure the plan stayed in compliance going forward.
RPCSI re-ran the testing using the accurate information and determined that the test failed. Due to the timing of our discovery we advised the client what the proper self-correction method was and advised them that they needed to make the recommended corrections to ensure the plan remained compliant and did not risk dis-qualification from the IRS. The client had to distribute the amount that was in excess of the allowable testing limits as well as pay into the plan an equal amount as a QNEC for all participants who were eligible in that plan year. This action complied with the IRS guidelines and made the plan compliant for 2018.
Had RPCSI not needed the test for review to have a plan design discussion, the incorrect test may not have been caught for several years which would have led to a more costly correction or if discovered under IRS or DOL audit,
it could have led to disqualification of their plan.