I grew up working on my family’s cattle ranch in Arizona. Out of all my responsibilities as a ranch hand, the worst by far was breaking ice on the drinkers. This was necessary in cold weather for the cattle to get water. It made for a relatively easy day which included driving in a heated truck to various wells. Chopping the ice with an ax was simple and even fun at times. It was reaching in and pulling out the ice with your bare hands that made the task so miserable.
As a teenager I didn’t see the value of removing the ice. On one occasion I was at my last stop of the day. My hands were frozen solid from bobbing for ice all day so I got lazy, chopped the ice up, and drove off without removing it. The ice blocks in the water quickly froze back together, leaving a small herd of cattle with nothing to drink for several days. One died. I’ll never forget the simple reprimand I got from a disappointed father. “Say what you’ll do, and do what you say.”
I heard of a situation discovered during the audit of a 401(k) plan this year, which made me think of this lesson I learned in my youth. This 401(k) plan had excellent internal controls, well qualified people in charge of governance and administration, and virtually no operational short-comings. However, several years ago, when the plan set up, someone had requested that the plan exclude bonuses from qualified compensation. This was omitted from the final plan document which expressly included bonuses in compensation.
Now, after years of operating under the assumption that bonuses were excluded from compensation, the auditors discovered that the plan document said otherwise. This means the employees were eligible for deferral and match on compensation that was not included in their eligible compensation. The company will be responsible for funding a significant portion of not only the employer match, but will also have to pay a portion of what the employee would have deferred and lost earnings over time. Final resolution has not been reached, but this will no doubt be a significant issue for the client.
The moral to the story is this. Much like fishing blocks of ice out of frigid water, nobody enjoys reading a 401(k) plan document. But, a legally binding commitment has been made in that document, whether you are aware of what it says or not. You have said what you are going to do. Take the time to read the document and make sure you are doing what you said. The results of not doing so could be much more devastating then a dead cow.
Rex Platt, CPA