Every retirement plan design begins with a study of a company’s payroll. It’s the essential information that drives thinking around how to optimize tax and savings potential for both business owners and their employees.
Once a plan is installed, we rely on payroll data to determine eligibility, vesting, and of course, contributions. Accurate and complete data is something we assume of course, but in the real world, information is not always timely or completely accurate. For example, people who should be listed may be missing. People who should no longer be listed may still be there. Changes to contribution rates are not always updated and reflected. These errors or omissions can be corrected, but since contributions and corresponding investment trades – both buys and sells – are dependant on this data, corrections can sometimes be expensive as markets move. This is only exacerbated if errors are not discovered until much later.
Good data is one thing, but there’s another huge assumption – and that is payroll data needs to be provided timely. Rules say that plans must generally deposit contributions as “soon as possible.” Late deposits can be costly in several ways:
– There can be fees to fix errors.
– There can be costs to make participants whole on lost earnings.
– A late deposit may be regarded as a prohibited transaction and subject to a 15% excise tax.
– And, if that wasn’t enough, late deposits are red flags to the regulators. A pattern of late deposits could trigger an audit of the plan by the Department of Labor.
Good data is essential. Timely data is essential. We need both to keep every plan on track. Let’s work together to remind company owners and HR professionals about this obvious, but critical component of our relationship with them.