This is Part 2 in our series Five Ways to Lose Your Tax Exempt Status.
The definition of compensation is vital to the accurate calculation of the ADP and ACP tests. A failure of the plan sponsor to follow the provisions of the plan document can result in a significant remuneration. It is important to understand and follow what is and not included in compensation when operating the plan. Items that typically vary from plan to plan include bonuses, commissions, overtime, and paid time off. Important steps to take to ensure compliance is to read the plan document’s definition of compensation and make sure that payroll is tracking elements of compensation appropriately. This should especially be done when there is a change to the process or service provider. If payroll failed to follow the terms of the plan document, then plan participant accounts should be compensated.
Check back next week for Part 3 of the series.