Avoiding Pitfalls in Compensation Definitions for Your 401(k) Plan

by | Oct 7, 2019 | PKF Texas - The Entrepreneur's Playbook®, Tax and Accounting Desk

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I am back again with Michael Veuleman, Audit Practice Leader and one of the faces of PKF Texas’ Employee Benefit Plan team. Michael, welcome back to the Playbook.

Michael: Thanks, Jen. It’s good to be back.

Jen: So, with 401(k) plans, also known as employee benefit plans, we hear a lot about the importance of using proper definitions for compensation within the 401(k) plan. Are there some pitfalls in this area that you’ve seen, because you’ve been in the space for quite a long time?

Michael: Jen, we hear a lot about definition of compensation for good reason. It’s very critical to the proper administration of a 401(k) plan. The definition of compensation is located in the plan document, and many times it’s very simple and straightforward but there are times where it’s very complex.

If your plan is being audited, your auditor should be reviewing for proper application of eligible compensation. If your plan is not being audited, at least on an annual basis, you should be reviewing your definition of compensation and comparing that to what is actually happening in your payroll system.

If new systems are implemented or there’s a change in provider, the administrator should carefully review that all of these components are applied properly. If, for instance, new bonus plans, fringe benefits or per diems are added to the system, you should really be careful that those are applied properly, because if you don’t apply them properly, then your definition of compensation is not correct.

Jen: And that seems like a pretty big deal. I think everybody wants their comp to be correct.

Michael: Absolutely.

Jen: All right, we’ll get you back to talk a little bit more about some more employee benefit plan topics, sounds good?

Michael: Sounds good.

Jen: All right thank you. For more information about this topic, visit www.pkftexas.com/BenefitPlanAudits. This has been another Thought Leader production brought to you by PKF Texas – the Entrepreneurs Playbook. Tune in next week for another chapter.

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