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How does it happen? It does

Part of my job is fixing errors made by plan sponsors and their plan providers. Despite what the top payroll providers who also serve as third-party administrators (TPA) may say, a good part of that job is fixing the errors they create, once one of their clients leave for a better TPA.


A new client is a plan sponsor with a new TPA and an old Form 5500 problem from 3 years ago. It seems the payroll provider improperly included employees who were excluded from participation in the 401(k) plan because they were union employees. The problem is that including these union employees put the plan over the 120-participant limit that would trigger a plan audit being required for Form 5500 (the 80-120 rule). The biggest problem is that the plan sponsors were never told of this independent audit requirement. The client filed Form 5500 without the audit and the government treats that as never filing a Form 5500 for that year where an audit was required. The client got a letter from the Internal Revenue Service with a $120,000 penalty.


This isn’t supposed to happen, I assure you. Yet it does. That is why it’s important to hire a quality TPA.

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