CRPS common mistakes
CRPS · Understand the traps and how to avoid them.
Selecting a safe harbor 401(k) to 'avoid all testing' and then treating the plan as exempt from top-heavy, vesting, and notice requirements without checking the conditions - e.g., assuming a safe harbor plan is automatically deemed not top-heavy even though it also receives a profit sharing or other employer contribution.
Marketing shorthand ('safe harbor means no testing') gets memorized as a rule instead of a conditional rule, and candidates stop checking which specific requirements are actually satisfied.
What to do instead
State the condition every time: the deemed top-heavy exemption applies only where the plan consists solely of elective deferrals and safe harbor contributions (and related earnings). Traditional safe harbor nonelective and match contributions must be 100% vested; QACA contributions may use a 2-year cliff. Non-safe-harbor employer contributions pull the plan back into top-heavy minimums.
Comparing SEP, SIMPLE IRA, solo 401(k) and defined benefit/cash balance options using the employee's gross W-2 or net Schedule C figure as the compensation base, and ignoring that a SIMPLE IRA generally cannot be maintained alongside another qualified plan for the same year.
Contribution math for the self-employed requires a multi-step derivation (net earnings from self-employment reduced by the deduction for one-half of SE tax, and for the employer contribution itself), and the exclusivity rules are easy to skip when the client is small.
What to do instead
For a self-employed client, compute the base as net SE earnings minus one-half SE tax, then solve for the employer contribution as a percentage of net earnings after that contribution rather than a flat percentage of gross receipts. Before recommending a SIMPLE, confirm the employer does not maintain another qualified plan covering the same employees.
Scheduling document work around the client's tax return date instead of checking the actual plan document and amendment deadlines - for example, assuming a new plan can be adopted retroactively at any point during the year or that a pre-approved plan never needs restating.
Deadlines for adopting a new plan, executing a restatement cycle, and adopting discretionary amendments come from different sources and fall at different points in the year, so candidates collapse them into one 'year-end' deadline.
What to do instead
Build a calendar keyed to plan year end and to the employer's tax return due date (including extensions) for new plan adoption, to the pre-approved plan restatement cycle, and to required amendment deadlines. Verify whether a particular retroactive adoption window is available for that employer type before promising it.
Treating the installation checklist as document signing only, and missing operational setup items - ERISA fidelity bond at the required amount, SPD delivery within the required period of establishment, first Form 5500 due date, payroll deferral start date, and the actual plan year chosen.
Installation is learned from document software output, which does not surface compliance items that live outside the plan document.
What to do instead
Use a written launch checklist: bond at 10% of plan assets subject to the statutory minimum and maximum (higher maximum where the plan holds employer securities), SPD delivery within the regulatory period after plan establishment and to new participants within the period after coverage begins, Form 5500 due the last day of the seventh month after plan year end with extension available, and a payroll system test before the first deferral date.
Mixing up the ADP and ACP tests - applying the ADP test to employer matching contributions and the ACP test to elective deferrals, or forgetting which contributions are aggregated and which compensation year is used for highly compensated employees.
The two tests have near-identical names and mechanics, and exam items often describe a plan with both deferrals and match, so the labels bleed together.
What to do instead
Anchor the definitions: ADP tests elective deferrals (pre-tax and Roth); ACP tests employer matching contributions and employee after-tax contributions. Both compare HCE and NHCE averages, and HCE status is generally determined on a lookback-year basis while the test runs on the current year's compensation.
Computing the 415(c) annual additions limit or the 401(a)(17) compensation cap incorrectly - including catch-up contributions in annual additions, ignoring forfeitures allocated to a participant's account, or applying the compensation cap to a partial year without prorating considerations.
Candidates memorize the headline dollar limits but not the definitional perimeter of 'annual additions' or which amounts sit outside the compensation cap.
What to do instead
Annual additions = elective deferrals (excluding catch-up) + employer contributions + forfeitures allocated to the account; the limit is the lesser of the indexed dollar amount or 100% of compensation. Catch-up contributions are excluded from annual additions and are not subject to the 401(a)(17) compensation limit. Check controlled-group aggregation before concluding a participant is under the limit.
Applying top-heavy minimums based on the current plan year's balances or on who is a key employee during the year being tested, instead of using the prior-year determination date and the applicable key employee lookback.
The determination date is a one-year lookback that feels counterintuitive, and 'key employee' sounds like it should match 'highly compensated employee.'
What to do instead
Top-heavy is measured as of the last day of the preceding plan year (last day of the first plan year for an initial year), and key employee status is tested with its own lookback and its own definition (officers above the compensation threshold, 5% owners, and 1% owners above the compensation threshold). The DC minimum is 3% of compensation, or the highest key employee allocation rate if lower; a top-heavy DB minimum accrues at 2% per year of service up to 20%.
Assuming that whoever signs the plan document or holds the title 'plan administrator' is or is not a fiduciary, and using '3(21)' and '3(38)' as interchangeable labels for an outside advisor.
Fiduciary status is functional, not title-based, and the two adviser categories are memorized as names rather than as different allocations of discretion and liability.
What to do instead
Apply the functional test: discretionary authority or control over plan management or disposition of assets, discretionary authority over plan administration, or rendering investment advice for a fee. Then distinguish the roles: a 3(38) investment manager has discretion, is itself a fiduciary, and relieves the appointing fiduciary of liability for individual investment decisions while leaving the duty to prudently select and monitor the manager; a 3(21) adviser renders advice while the named fiduciary retains discretion and decision-making liability.
Advising that participant deferrals were deposited 'within the 15th business day of the following month' and treating that as a safe harbor for every plan.
A commonly referenced outer boundary gets misremembered as a universal rule, and the small-plan safe harbor is conflated with the general rule.
What to do instead
The general rule is deposit as soon as the amounts can reasonably be segregated from the employer's general assets, with a seven-business-day safe harbor for plans with fewer than 100 participants. For larger plans there is no safe harbor; the mid-month date functions at most as an outside boundary and is a red flag if routinely used. Establish a documented deposit policy and follow it consistently.
Telling a client that an operational error can be fixed under self-correction without first classifying the failure - its significance, whether the plan is under examination, and whether the failure type is eligible for self-correction at all.
Self-correction is the fastest and cheapest route, so candidates reach for it first and skip the eligibility screen.
What to do instead
Classify first: operational versus document versus demographic, significant versus insignificant, and whether the plan or a representative is under examination. Self-correction is available for insignificant failures at essentially any time and, following the SECURE 2.0 expansion, for many eligible inadvertent failures subject to conditions and exclusions; otherwise use the formal submission program. Fiduciary breaches (for example, late deposit of deferrals with lost earnings) are corrected through the separate voluntary fiduciary correction program, which is a different track. Document the classification and the correction method in the file.