QKA common mistakes
QKA · Understand the traps and how to avoid them.
Answers a qualification question by citing a Department of Labor rule, or treats a fiduciary breach or prohibited transaction as automatically disqualifying the plan.
ERISA Title I (DOL) and the Code's qualification requirements (IRS) cover overlapping subject matter, so study material presents them side by side and the enforcement lines blur under time pressure.
What to do instead
Classify the issue before choosing an answer: qualification, tax treatment of contributions/distributions, and excise taxes are Code/IRS matters; fiduciary conduct, reporting, and prohibited transactions are ERISA Title I/DOL matters. Remember that a prohibited transaction normally produces an excise tax under IRC 4975 corrected on Form 5330, not automatic disqualification.
Runs the 410(b) ratio percentage test using only the participant population, or only employees who were employed on the last day of the plan year, instead of the full employee census.
Census data is usually generated from payroll and eligibility files, which silently drop terminated employees, non-electing employees, and employees who never met the plan's eligibility conditions.
What to do instead
Build the test population from the complete employee census; remove only employees covered by a statutory exclusion (under age 21, under one year of service, nonresident aliens, collectively bargained). Test any otherwise-excludable group separately if the plan treats them separately, then compute the ratio percentage and, if it falls below 70%, run the average benefit test.
Leaves catch-up contributions inside the ADP and ACP numerators and denominators, then processes corrective distributions out of total deferrals.
Payroll and recordkeeping reports usually show a single deferral total, and catch-up amounts are often identified only at year-end after the 402(g) excess is calculated.
What to do instead
Determine catch-up first (amounts exceeding the 402(g) dollar limit or a lower plan limit), strip it out of both HCE and NHCE test data, and run ADP/ACP on the remaining deferrals and match. Take any corrective distribution from non-catch-up dollars so the distribution is not inadvertently recharacterized.
Applies the 415(c) annual additions limit plan by plan and counts only elective deferrals and matching contributions.
Recordkeeping systems track annual additions for one plan at a time, and forfeitures allocated to accounts plus employee after-tax contributions are easy to overlook when summing.
What to do instead
Aggregate annual additions across every defined contribution plan of the controlled group, include elective deferrals, matching and nonelective contributions, forfeitures allocated to the account, and employee after-tax contributions, then cap at the lesser of the applicable dollar limit or 100% of 415(c) compensation. Catch-up contributions are not annual additions and come out of the calculation.
Pays an eligible rollover distribution directly to the participant with no withholding or with 10% withholding, and delivers the 402(f) notice on the day of distribution or not at all.
The 10% default withholding that applies to non-periodic payments is learned early and gets confused with the separate 20% mandatory rule for eligible rollover distributions.
What to do instead
Treat any distribution that is an eligible rollover distribution as subject to 20% mandatory federal withholding unless it is paid in a direct trustee-to-trustee rollover. Deliver the 402(f) notice no fewer than 30 and no more than 180 days before the distribution. Hardship withdrawals are not eligible rollover distributions and fall under the elective withholding rules instead.
Computes the $50,000 loan maximum as $50,000 minus the current outstanding balance, and permits repayment less often than quarterly or over a term longer than five years without a home loan exception.
The current balance is what the recordkeeper reports, while the statutory lookback requires a separate pull of the highest balance during the prior 12 months.
What to do instead
The maximum is the lesser of (a) $50,000 reduced by the excess of the highest outstanding loan balance during the prior 12 months over the current outstanding balance, or (b) 50% of the vested account balance. Require substantially level amortization with payments at least quarterly and a five-year maximum term unless the loan is for a principal residence.
Deposits participant deferrals once a month together with a later payroll run, reasoning that the plan is small enough that the timing does not matter.
The standard is a facts-and-circumstances 'as soon as administratively feasible' test with a small-plan safe harbor that is often misremembered as a flat 30-day or 15-day rule.
What to do instead
Deposit as soon as administratively feasible; plans with fewer than 100 participants have a safe harbor of no later than the seventh business day after withholding. Correct late deposits through the DOL program with lost earnings, and address the IRC 4975 excise tax on Form 5330 unless relief is requested.
Counts participants for Form 5500 purposes by counting only people with an account balance on the last day of the plan year, which drives the wrong form, the wrong schedule, or an incorrect audit determination.
Participant counts in plan administration are usually built from balance records, while the Form 5500 count is built from eligibility, so the two figures differ and the threshold decision is made on the wrong number.
What to do instead
Count employees eligible to participate (whether or not they elected to defer) as of the first day of the plan year, plus certain separated participants with account balances, and use that count to choose between Form 5500-SF and Form 5500 with Schedule H and to apply the audit requirement including the 80-to-120 transitional rule. File by the last day of the seventh month after the plan year end, using Form 5558 for an extension.
Determines top-heavy status using balances as of the last day of the plan year being tested, and tests the plan in isolation without building the required aggregation group.
The top-heavy determination date and measurement date are mechanical rules that differ from the plan year and from the ADP/ACP measurement period, and aggregation groups are easy to forget when only one plan is in front of the administrator.
What to do instead
Use the determination date (the last day of the preceding plan year; the last day of the plan year for a plan's first year), take balances as of the most recent valuation date within the 12-month period ending on that date, count distributions made during the five-year period ending on the determination date, exclude rollovers, and include every plan in the required aggregation group plus any permissive aggregation group the plan relies on.
Uses self-correction for any operational error without confirming the plan had established practices and procedures, or attempts self-correction for an egregious or discriminatory failure.
Self-correction is learned as a general-purpose fix and the conditions that gate it are treated as boilerplate rather than as tests that must each be satisfied.
What to do instead
Confirm all conditions before self-correcting: the plan had established practices and procedures reasonably designed to promote compliance; the failure is insignificant, or if not insignificant it is corrected by the end of the second plan year following the plan year in which it occurred; and the failure is not egregious and would not be discriminatory if corrected. If any condition fails, submit under the determination letter program instead.