Why Use an Employee Census for Retirement Plans?

The U.S. Department of Labor and Internal Revenue Service set requirements that govern qualified retirement plans. If the plan favors higher-paid employees (key employees), the IRS considers the plan "top heavy." Retirement plans provide an employee census each year to test the plan.

Key Employees

The IRS defines key employees three ways: someone who owns more than 5 percent of the company, someone who owns more than 1 percent and earns more than $150,000, or an officer who earns more than an annually-indexed salary, $160,000 in 2010.

Annual Testing

According to the IRS, qualified retirement plans must pass an annual top-heavy test. If the test indicates more than 60 percent of the plan's aggregate assets belong to the key employees, the plan must extend minimum benefits to rank-and-file employees.

The Census

The annual census contains information about each employee, such as birth date, hire date, hours, salary and contribution to the plan. The census is generally analyzed by a disinterested "third party administrator."

Consequences

Failing the top-heavy test could surprise the employer and the employees with an unexpected tax bill. The error can be fixed by several methods and must be accomplished within two years.

References

• IRS: The Fix is In---Common Plan Mistakes--Top-Heavy Errors in Defined Contribution Plans
• College for Financial Planning: 2010 Annual Limits Related to Financial Planning

Resources

• Retirement Designs: Traditional 401(k) or Safe Harbor 401(k)