Common 401(k) Plan Mistakes

Plan administration for your company’s 401(k) can be a complicated task, but as a plan sponsor, making mistakes, even inadvertent ones, can be extremely costly.  Additional payments, taxes and fines are common, while in extreme cases of mismanagement, plans can be disqualified altogether.  Below are some of the more common mistakes that sponsors make.

Missed Deferrals

This one is common enough that the IRS has information on its web site about how to correct it, but correcting this can be expensive, especially if these errors have been accumulating. For instance, if an employee’s deferral has been mistakenly paid as taxable income, the employer would need to make a corrective contribution of 50% of the missed deferral, adjusted for earnings.  This error, and others, can be fixed through the IRS’s Employee Plans Compliance Resolution System (EPCRS).

Failure to Transfer Deferrals in a Timely Manner

The Department of Labor requires that deposits be made “as soon as administratively feasible.”  This time can change depending on the plan and the size of the company, but if an audit determines that a sponsor has not been making deposits in a timely manner, penalties can range from voluntary correction to fines and back payments on missed earnings.

Not Tracking Loan and Hardship Repayments

Not all plans allow for loans or hardship withdrawals.  For those that do, what is allowed can vary considerably between plans.  Some plans, for instance, allow multiple loans, while others will allow hardship withdrawals but not loans.  It is important that plan sponsors understand the conditions under which hardship withdrawals can happen and for loans, ensure that repayments are happening in a timely manner.

Failure to Understand and Apply the Plan’s Definition of Compensation.

Contributions are calculated on the plan’s definition of compensation.  Some plans include bonuses, while others do not; same with overtime pay.  If there are forms of compensation that aren’t addressed in the plan, sponsors should make the necessary changes to include those.  Failure to follow the plan’s definition can lead to companies underpaying deferrals, which can result in penalties if not quickly corrected.

Poor Documentation

From sponsors not documenting changes properly to failing to send out required notifications, documentation problems are quite common.  They can also be expensive.  The Department of Labor can levy big fines on companies that fail to send out things like summary plan descriptions, eligibility alerts or other required notices.

Avoiding Issues

Mistakes are going to be made from time to time.  The most important take-away is to fully understand the plan being offered, be aware of potential problems, and be in a position to quickly correct any issues that arise. 

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