A telecommunications firm decided to transfer the recordkeeping responsibilities of its 401(k) plan to Milliman during the second quarter of the year. In the course of the transition to the Milliman processing center, the implementation analyst performed a standard data audit. Because the analyst had knowledge of how the plan should have operated, and because Milliman consultants routinely go above and beyond standard procedure, the analyst inquired about the location of catch-up contributions on the payroll file. Were the catch-up contributions reported separately or included with the regular employee salary deferrals?

The client researched and reported that since the new calendar year, catch-up contributions were no longer reported in the deferral column as they had been in the prior year. After further research, the analyst discovered that the firm had not deposited the catch-up contributions to the trust and as such, the contributions had not been allocated to participant accounts.

Proactive alert warns client of lapse

The Milliman team informed the client that the Department of Labor (DOL) requires that an employer must transmit participant contributions “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets,” but in any event not later than the 15th of the month following the month in which the participant contributions are withheld. An employer is in violation of this rule if it remits the contributions by the latest date when doing so earlier was possible, and the plan is considered to have incurred a prohibited transaction. Any such delinquencies must be addressed in accordance with DOL procedures, including correcting the prohibited transaction and paying an excise tax on the amount involved.

The plan sponsor was duly concerned about the correction and legal ramifications of this oversight and asked Milliman to advise it on the proper corrective measures.

Quick corrective measures reduced costs

Milliman consultants reviewed the specifics of the contributions, identifying the affected participants, the dates the contributions should have been deposited, and dates the contributions actually were deposited. The team then determined the earnings originally needed to make the participant accounts whole, if the catch-up contributions had been deposited with the regular deferrals. We calculated the amount of federal excise tax, which the plan sponsor reported and paid. The client also deposited the required contributions and earnings to the trust and Milliman appropriately allocated the amounts to participant accounts.

Because the Milliman analyst researched beyond what was required in a standard audit, the discrepancy was found and consequently rectified much earlier than it would have been otherwise. The client saved additional excise taxes and compounded earnings on contributions and these actions also helped avoid a potential employee and public relations issue.

Guarding against future oversights

Milliman wanted to ensure that this situation would not occur again. Because the plan provided a match on all employee deferrals, including catch-up contributions, our consultants determined there was no reason for these contributions to be reported separately on the payroll file. We worked with the payroll company to alter the payroll format to include both employee deferrals and catch-up contributions in the same column. This simplified the process and ensured against future oversights.

The plan sponsor was grateful that Milliman audited the data during the implementation stage and proactively identified the problem. The client also was impressed with the consulting expertise provided to rectify the oversight and was pleased that we established measures to prevent the issue from recurring in the future.