Identifying Compliance Errors in a 401(k)

Posted by cskadmin on April 10, 2012

Compliance errors within 401(k) plans frequently can be corrected without incurring significant fines.

Given the complexity of 401(k) plans, mistakes are made even when plan sponsors try to follow the letter of the law. The Internal Revenue Service (IRS) maintains several correction programs, as well as a 401(k) Plan Fix-It Guide, that can help plan sponsors determine whether their procedures adhere to IRS requirements, and if a sponsor discovers an error, how to amend the situation.

During an IRS conference call on March 6, 2012, Director of Employee Plans Examinations Monika Templeman mentioned several mistakes that could disqualify a 401(k) plan.1

  • Failure to amend written documentation when tax laws change.
  • Failure to maintain materials such as the original plan document, IRS opinions, amendments, and others.
  • Failure to document actions taken by the board of directors.
  • Failure to comply with a plan’s definition of compensation.
  • Failure to follow laws relating to eligibility and repayment periods for 401(k) plan loans.
  • Failure to make matching contributions to eligible employees or making contributions to employees who are not eligible.

Note that this list is not all-inclusive, and it is important to conduct an annual review to ensure that yourplan adheres to regulations imposed by the IRS and the U.S. Department of Labor.

The 401(k) Plan Fix-It Guide prompts sponsors to ask themselves several questions in an attempt todetermine whether their plans are compliant: 2

  • Has your plan document been updated within the past few years?
  • Do the plan’s operations follow the terms stipulated in the plan document?
  • Is the plan correctly applying the definition of compensation when determining deferrals?
  • Has the plan satisfied nondiscrimination tests?
  • Were all eligible employees given the opportunity to make elective deferrals?
  • Are elective deferrals limited to the amounts stipulated by federal law?
  • Were matching contributions made to the appropriate employees?
  • Does the plan deposit deferrals as soon as they can be segregated from corporate assets?
  • Do participant loans conform to the plan documentation and also to federal laws?
  •  Were correct procedures followed for hardship withdrawals?

If these or other questions reveal a mistake, you can contact your tax advisor or get in touch with the IRS directly. A mistake does not automatically mean that a severe penalty will be levied. According to the IRS401(k) Plan Checklist, depending on the situation, many errors can be corrected easily and without notifying the IRS.

1Source:, “Failure to Amend Among Top Compliance Problems for 401(k) Plans, IRS Reports,” March 22, 2012.

Source: U.S. Internal Revenue Service, 401(k) Plan Checklist.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.


© 2012 S&P Capital IQ Financial Communications. All rights reserved.

April 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Strategies, Inc., a local member of FPA.