When you look at the problems of retirement plans, one that gets short shrift is coverage and that is one of the pillars of qualified plans needed to be fulfilled in order to be a qualified plan. It’s a forgotten rule of compliance that can always end up leading to plan disqualification if the employer fails to properly cover enough of their employees in order to satisfy minimum coverage tests.
I don’t want to get into a complex discussion on coverage, but you need to know that every plan sponsor must annually meet coverage to ensure that the minimum amount of people that need to be covered are. One big problem with coverage is that there are third-party administrators (TPAs) that may forget to actually perform the test or tests and if a plan would have failed, then the corrective methods aren’t made and it becomes a bigger headache many years later especially when caught on a government audit.
The other problem with coverage is understanding that a group of corporations that have some common ownership and/or some affiliation may be counted as one company under the controlled group or affiliated service group rules which means that employees of these other companies may have to be covered under the one company who sponsors a retirement plan. How does an error like that happen? A TPA not getting the rules analyzed correctly based on the corporate fact pattern or the plan sponsor failing to tell the A that there are these affiliated companies with common ownership that needs to be reviewed.
In terms of errors, failing to provide benefits to employees who needed to be covered under a retirement plan for coverage is one of the deadliest errors made by a plan sponsor and a candidate for plan disqualification.