The document discusses 10 common mistakes made in calculating compensation for defined contribution retirement plans. These include using the wrong definition of compensation from the plan documents, including severance pay which is not allowed, failing to follow the plan's compensation definition consistently, and not accounting for all pay-related items like bonuses and fringe benefits. It emphasizes carefully following the plan document's compensation definition and calculating it consistently for all employees and locations to avoid errors and noncompliance with IRS regulations.

1. GRAND CANYON UNIVERSITY SCENARIO GENERATOR
Module 4 Scenario: Hiring Plan and Compensation Package
Proposal
Type: Family Business
Size: Small Business
Sector: Computer Repair
Funding: Investors/Lenders
Stakeholders:
Employees
Decision makers:
Owners
Formal organization:
LLC
Human Resources Department:
Pay-for service arrangement: employment law attorney
Stage in Organizational Lifecycle:
Birth
THESE ARE THE GIVEN CONSTRAINTS:
ORGANIZATIONAL BACKGROUND:
Founded in: 1970
Dedicated to: The company thrives to provide the best possible
experience to all of its business partners and clients.

2. Culture Our culture is akin to that of a small family. All our
employees are partners in the business, share our success, and
help us
sustain the core values that make us successful.
Structure: Our organization is very flat and consists of three
tiers:
owners, managers, and non-manager employees.
Mission statement: To ensure that each customer receives
prompt,
professional, friendly, and courteous service. To maintain a
professional and friendly environment for our cusotmers and
staff. To
provide at a fair price using only quality components. To ensure
that
all customers and staff are treated with the respect and dignity
they
deserve. To thank each customer for the opportunity to serve
them. By
maintaining these objectives we shall be assured of a fair profit
that
will allow us to contribute to the community we serve.
Vision statement: Within the next five years, we will become a
leading
provider of products and services to small businesses by
providing
page 1 / 4
customizable, user-friendly solutions scaled to small business
needs.

3. INTEGRITY: By dealing honestly with our clients, staff,
vendors and
community.
RESPONSIBILITY: By considering the environment in which
we do
business, community views and the common good.
PROFITABILITY: By being aware that an appropriate level of
profit is
necessary to maintain our business and allow our values to
continue to
be observed.
Values statement: In conducting our business, we will realize
our
vision by performing our affairs so that our actions provide
confirmation of the high value we place on:
Present goals: To reduce delivery and distribution time of
products
and services. To reduce the number and frequency of customer
complaints, and to improve the response time of customers
inquiries.
Past goals: To reduce employee turnover by 20 percent by
introducing a
new employee assistance program. To improve productivity by
implementing a company-wide training program. To actively
recruit
skilled workers into the organization.
Brief SWOT analysis:
Strengths:
Positive cash flow

4. Experienced management
Good business reputation
Known for product quality
Weaknesses:
Experienced management approaching retirement
Insufficiently diversified revenue streams
Products and/or services have not been updated for a long time
Too much internal bureaucracy
Opportunities:
International expansion via Internet business
Buy out some competitors
New initiatives to streamline decision making
Technological advances
Threats:
Changing demographics
Vulnerability to recession and business cycles
Unproven relationship between government and private sector
Changing needs and preferences of stakeholders
Changes in regulation, standards, and compliance requirements
FEEDBACK:
Customer feedback:
Negative comments:63
page 2 / 4
Positive comments:87
Issue resolution:6
Reachability:3
Cancellation:6
Friendliness:4
Product knowledge:9
Overall:4.8
Employee feedback:

5. Negative comments:74
Positive comments:20
Negative comments:74
Positive comments:20
Issue resolution:2
Reachability:7
Cancellation:3
Friendliness:7
Product knowledge:2
Overall:3.5
RESEARCH USING LibGuides:
Generic http://libguides.gcu.edu
Specific http://libguides.gcu.edu
REFLECT ON:
Question 1: Do organizational goals support the mission,
vision, and
values statements?
Question 2: Does the organizational structure support the
strategic
plan for the organization, communication, decision making,
customer
service, employee engagement and satisfaction, and cross
department
interaction?
Question 3: Are there apparent gaps in skills, talent, or
diversity
in the leadership team or staff?
Question 4: From a review of the information provided, what
areas
are in need of further development?
DELIVERABLES:
In this assignment you will consider strategic issues in staffing,
succession, compensation, and diversity management. Assume

6. the role of
a manager within your chosen organization and create a report
to the
management team, which addresses the most critical aspects of
hiring
and succession in the organization. Address all the topics
outlined
below.
Describe the main components of the hiring/succession plan
(manager's
role) addressing:
-- Candidates evaluation
-- Training
-- Key positions
-- Access to records
-- Interest assessment
Describe the main components of the recruitment plan (HR role)
including the following sections:
page 3 / 4
-- Needs assessment
-- General and specific recruitment
-- Goals, strategy, and action steps
-- Methods of recruitment
-- Budget (summary of main items)
-- Recruitement resources
-- New employee orientation and training
Describe the main components of the compensation plan: salary
study
and incentive plan (compensation committee role), addressing
-- The compensation philosophy
-- Pay policy regarding hiring, promotion, and merit
-- Pay range alignment with external market analysis

7. -- Communication of pay policies to employees
-- Consistency
Describe the main components of the diversity management
policy,
addressing:
-- Recognition and respect for the individual differences
-- Maintaining a positive workplace environment
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23 July 2017 ProQuest
Table of contents
1. Avoiding 10 Common Plan Compensation
Mistakes....................................................................... ..........
... 1

8. 23 July 2017 ii ProQuest
Document 1 of 1
Avoiding 10 Common Plan Compensation Mistakes
Author: Lyon, Heidi A
Publication info: Employee Benefit Plan Review ; New York
66.9 (Mar 2012): 29-30.
ProQuest document link
Abstract: Calculating compensation does not seem like
something that should trouble retirement plan
administrators and sponsors. Yet, it is one of the most common
errors made in administering retirement plans
and doing it accurately requires significant attention to detail. If
plan document says use a W-2 or RCA definition
of compensation, that does not mean the plan automatically can
use a participant's W-2 Box 1 or Box 5 wages
for compensation. Usually these definitions require that plans
add or subtract additional items. Pay related to an
individual's employment termination cannot be included in
compensation for 401(k), 457(b), or 403(b) deferral
purposes. The IRS has indicated severance pay is not pay to an
employee and only employees may make tax-
free deferrals. Every retirement plan document must define
compensation. It is necessary to know how the plan
document defines it and follow that definition. If there is one
plan document covering employees at multiple
locations, each location should be calculating compensation the
same way.
Links: Check for Full Text
Full text: Calculating compensation does not seem like
something that should trouble retirement plan
administrators and sponsors. Yet, it is one of the most common
errors made in administering retirement plans

9. and doing it accurately requires significant attention to detail.
This Special Report discusses how to avoid 10
common mistakes when calculating plan compensation for
defined contributions plans.
1. Using Box 1 or Box 5 Wages. If plan document says use a W-
2 or FICA definition of compensation, that does
not mean the plan automatically can use a participant's W-2 Box
1 or Box 5 wages for compensation. Usually
these definitions require that plans add or subtract additional
items. For example, a participant's 401 (k) elective
deferrals (other than Roth deferrals) generally must be added
back to the participant's W-2 Box 1 wages to
calculate plan compensation.
2. Deferrals of Severance Pay. Pay related to an individual's
employment termination cannot be included in
compensation for 401 (k), 457(b), or 403(b) deferral purposes.
The IRS has indicated severance pay is not pay
to an employee and only employees may make tax-free
deferrals. This also means an individual cannot elect to
defer payments made after employment terminates, except that
the individual may defer regular pay, vacation
pay, and sick leave pay if it is paid before the end of the year
employment terminates or, if later, within 2Vi
months of termination.
3. Failure to Follow Plan Terms. Every retirement plan
document must define compensation. It is necessary to
know how the plan document defines it and follow that
definition. Plans can be penalized for using a definition
that is inconsistent with the terms of the plan document and
they may end up giving employees incorrect
contributions if they are using the wrong definition.
4. Inconsistent Payroll Practices. If there is one plan document
covering employees at multiple locations, each
location should be calculating compensation the same way. Plan
documents generally do not address how
each specific item of pay should be handled, and some types of

10. pay could arguably fall in more than one
category (e.g., one location may classify a gift card as a fringe
benefit and another as a bonus). Compensation
must be calculated uniformly with respect to all employees
covered by a plan unless the plan document requires
otherwise.
5. Discriminatory Definition. A compensation definition will
not be discriminatory if it falls within one of the safe
harbor definitions based on W-2 pay, FICA pay, or pay under
Code Section 415. Any deviation from a safe
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harbor definition must not discriminate in favor of highly
compensated employees and must be tested annually
to ensure no discrimination is occurring. For example, a plan
that excludes bonuses from compensation must
test its definition annually because all of the safe harbor
definitions require the inclusion of bonuses.
6. Incorrect Period of Compensation. It is common to use the
wrong time period for calculating compensation.
Some situations require looking at plan year rather than

11. calendar year compensation. Other situations require
using only compensation for the period an individual is eligible
to participate in the plan as opposed to the
individual's compensation for the whole year. For example, in
determining compensation for a top heavy
contribution, it's necessary to calculate compensation for the
entire year.
7. One Definition for Multiple Purposes. Plans require
administrators to calculate compensation for multiple
purposes, including deducting salary deferrals, figuring
employer contributions, determining compensation or
deferral limits, running nondiscrimination tests, and calculating
top heavy contributions. The definitions for each
purpose may differ, so it is important to know how many ways
compensation must be calculated for a particular
plan.
Further, plans sometimes can be drafted to minimize the number
of calculations required and simplify
administration if there is flexibility on what should be included
or excluded.
8. Exclusion of Noncash Benefits. Sometimes a plan document's
definition of compensation will require
inclusion of the value of noncash benefits an employee receives.
These amounts are often overlooked when
calculating compensation to determine percentage salary
deferrals and/ or the amount of employer
contributions for participants.
9. Failure to Deduct Deferrals from Extra Payrolls. It is
frequently forgotten that elective deferrals must be
deducted from extra payrolls or special payments to employees
where the pay falls within a plan's
compensation definition. For example, problems often arise
when running extra payrolls to pay bonuses that
should be included in compensation. Every time compensation
is paid, regardless of the process, payroll
processors should be trained to consider whether deferrals must

12. be deducted from the compensation.
10. Earned Income of SelfEmployed individuals. Special rules
apply to the calculation of compensation for self-
employed individuals. Compensation must be based on the
individual's earned income. Complicated formulas
are then applied to adjust that income based on things like the
individual's FICA liability and any "employer"
contributions the individual is eligible to receive. These issues
tend to arise in plans sponsored by employers
that are taxed as partnerships.
AuthorAffiliation
Heidi A. Lyon is a partner with Warner Norcross &Judd LLP in
the Employee Benefits area. She can be reached
at [email protected]
Subject: Wage & salary administration; Defined contribution
plans; Guidelines;
Location: United States--US
Classification: 9190: United States; 6400: Employee benefits &
compensation; 9150: Guidelines
Publication title: Employee Benefit Plan Review; New York
Volume: 66
Issue: 9
Pages: 29-30
Number of pages: 2
Publication year: 2012
Publication date: Mar 2012
23 July 2017 Page 2 of 3 ProQuest
Section: Special Report
Publisher: Aspen Publishers, Inc.
Place of publication: New York
Country of publication: United States
Publication subject: Social Services And Welfare, Business And

13. Economics--Labor And Industrial Relations
ISSN: 00136808
CODEN: EBPVAL
Source type: Trade Journals
Language of publication: English
Document type: Feature
ProQuest document ID: 928757406
Document URL:
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/docview/928757406?accountid=7374
Copyright: Copyright Aspen Publishers, Inc. Mar 2012
Last updated: 2012-03-17
Database: ProQuest Central
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10 Common Plan Compensation Mistakes