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Keys to Avoiding Compensation Errors

The plan’s defi nition of “compensation” is important for many different aspects of plan administration — including elective deferrals, allocations, and discrimination testing. Plan sponsors need to be certain that the defi nition of compensation is properly applied. Failure to do so could result in an operational failure and possibly affect the plan’s qualifi ed status.  Mistakes may arise because many plan sponsors operate their plan based on a plan summary of the definitions and operational requirements. But as the plan is amended, the compensation defi nition may change while the
plan continues to operate as it had previously.  To avoid compensation-related mistakes, the IRS recommends the following:

  • Review your plan document for the defi nition of compensation for each plan purpose.
  • Use the statutory defi nition of compensation when required.
  • Ensure that your payroll processor and plan administrator receive accurate compensation data.
  • Simplify your plan’s defi nition of compensation by considering using one defi nition for all plan purposes.
  • Review your plan for errors and use the IRS correction programs to fi x them as quickly as possible.

In addition, your plan may avoid mistakes by properly training the plan personnel who determine compensation to confi rm they understand the plan document.

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