You may be wondering why we mention year-end payroll procedures related to a 401(k) Plan. The reason is that in most cases, compensation drives 401(k) withholdings and Company match amounts if applicable. It also usually impacts any profit share calculation and affects discrimination testing results. Payroll processing is actually a key component of a 401(k) Plan.
As we approach year-end, to ensure 2021 goes smoothly for your Plan from a payroll perspective, here are some things to consider.
- Ensure payroll reconciliations at year-end are completed and all identified items are reconciled. This is crucial to ensure W-2’s are processed accurately. The year-end data will be utilized to prepare the next year’s Plan Census, so this reconciliation serves multiple purposes.
- Identify any errors that occurred in payroll processing in the prior year that impacted the Plan. Ensure that remediation was put into your processes to verify the errors will not re-occur.
- Review the definition of compensation in your 401(k) Plan document. Make sure you are following this definition in your payroll process. If bonus payments need to be included in the 401(k) deferral calculation make sure you have the system coded appropriately for this. Review the 401(k) Plan requirements with all payroll staff to ensure they are handling all compensation appropriately.
- Review the new IRS 401(k) limits with your payroll staff. (See an earlier blog post on this topic for more information on the limit changes.) Ensure the system has been set up to make the changes effective January 1st.
- Look at the current access to your payroll system for all staff that conduct payroll processing. Make any necessary adjustments. If you have turnover in the administrative areas in your company, it is a good idea to review this access on a more regular basis.
- Look at the current year discrimination testing results. If you failed the ADP/ACP tests, review the results with your highly compensated employees. They may wish to change their deferral patterns to ensure they do not receive refunds from the testing going forward.
- If your Plan has a year-end Company match deposit, make sure it is completed timely and review it for accuracy. Similarly, if your Plan offers a profit share option, review the actions needed. Make sure you communicate actions that will be taken with employees to ensure they are aware of all Company contributions to their account.
- If you are considering changing payroll systems or providers, verify you have saved all payroll information from the prior system before changing to a new one. Gaining access to older information once you make the change can prove to be very difficult.
At Summit CPA we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.