Recently, the Internal Revenue Service (“IRS”) announced the cost-of-living adjustments affecting the dollar limitations for pension plans for tax year 2013. At this time, we recommend that every plan sponsor conduct a “mini-audit” of their 401(k) plan to ensure that the proper plan limits are being utilized and that the plan is being administered in accordance with the plan requirements, especially related to the plan’s definition of compensation. The new plan limits are:
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Consistent with the IRS’s own audit findings, we have also found that company payroll departments and outside payroll service providers are often using an improper definition of compensation when administering the plan. Many payroll departments are either improperly including or excluding commissions, bonuses or overtime as part of “compensation.” When an employer fails to correctly account for commissions, bonuses or overtime as part of “compensation,” an “operational failure” (failure to follow the plan terms) occurs which requires the employer make a corrective contribution to the plan for the benefit of the affected employees. In addition to the corrective contribution, depending on the facts and circumstances, employers should consider filing a voluntary correction application under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). By filing an application with the IRS, the employer is seeking a compliance statement from the IRS that concurs with the correction methods taken by the employer.