I received a notice from my 401k TPA saying my plan must be restated. What should I make sure to look for when it comes to prevailing wage?
The IRS is requiring most 401ks to be restated before July 31, 2022. This simply means a new Adoption Agreement must be executed.
Quite a few plans are not structured as needed to allow maximum credit for PW contributions. Some are even set up to be punitive in that regard.
Questions to Ask During a 401k Plan Restatement
Here are just a few of the things to look for:
- Are company contributions calculated per hour, or is some other time period used for compensation? In Prevailing Wage, each hour stands alone.
- If the plan calls for a PW schedule or Amendment (as most all do), where does that come from and whose responsibility is it?
- Does the plan allow for Company contributions, such as a discretionary match or a profit sharing contribution, to be offset with a PW contribution for the specific time period of that contribution, (ie: per hour)?
- Is the PW contribution a QNEC, limiting the availability of this money to an employee if they still work for you? For example, if Johnny Employee has a $10,000 medical bill for his child, can he get the money from the Plan without quitting his job or having to pay it back?
- Does your plan annualize contributions? This has a very large and expensive downside potential in regards to the PW contribution.
- (Even though this sounds cliché) Is the plan doing what you want, or are you doing what the plan wants?
Other Restatement Considerations
Some other considerations to keep in mind:
- Monitor the 404a Company deductibility limit. Companies performing a high percentage of prevailing wage work should monitor this carefully.
- Understand In-service distributions to existing employees from the Prevailing Wage contribution.
- Discussing Highly Compensated Employees (HCEs) eligibility to receive Prevailing Wage Contributions.
- Discuss Profit Sharing as an option to reward good employees who do not have an opportunity to receive Prevailing Wage contributions.
Prevailing wage makes 401(k) plan design different from more traditional 401(k) plan setups. Make sure your providers under these differences.