What are the Top 10 Most Common Mistakes Made in the Administration of 401(k) Plans?
Published:by Stacey L. Spencer, QKA, Manager, Employee Benefit Services Group
Every year it is important that you review the requirements for operating your 401(k) retirement plan. The Internal Revenue Service (IRS) has released a list of the 10 most common mistakes made in the administration of 401(k) Plans. This checklist offers a starting point for developing internal controls regarding plan compliance procedures. If you would like assistance in establishing or reviewing your companys internal controls, please contact us to schedule a free review.
1. Has the plan document been updated within the past few years to reflect recent law changes?
If your plan has not been updated to reflect EGTRRA changes, the plan needs to be revised by April 30, 2010.
2. Are the plans operations based on terms of the plan document?
Failure to follow the terms of the plan is a common problem encountered on audit. Be sure to notify your third party administrator of any changes in the form or operation of your plan, including acquisition and ownership changes.
3. Is the plans definition of compensation for all deferrals and allocations used correctly?
Because your plan may use different definitions of compensation for different purposes, its important that you apply the proper definition according to your plan document.
4. Were employer matching contributions made to all appropriate employees under the terms of the plan?
The terms of the plan must be followed when allocating employer matching contributions.
5. Has the plan satisfied the nondiscrimination tests?
Every 401(k) plan must satisfy yearly ADP/ACP nondiscrimination tests except for certain auto enrollment and 401(k) safe harbor plans.
6. Were all eligible employees identified and given the opportunity to make an elective deferral election?
By supplying your third party administrator with information regarding all employees who receive a Form W-2, you may reduce the risk of omitting eligible employees.
7. Are elective deferrals limited to the amounts under Internal Revenue Code section 402(g) for the calendar year and have any excess deferrals been distributed?
Failure to distribute deferrals in excess of the 402(g) limit may result in additional taxes and penalties to the participant and employer. The limit for 2009 and 2010 is $16,500.
8. Have employee elective deferrals been deposited in a timely manner?
You should deposit deferrals as soon as they can be segregated from the employers assets, but no later than the 7th business day following the payroll date.
9. Do participant loans conform to the requirements of the plan document and IRC§72(p)?
Defaulted loans or loans in violation of IRC §72(p) may be treated as a taxable distribution to the participant.
10. Were hardship distributions made properly?
If a plan allows hardship distributions, the terms of the plan must be followed. Hardships are allowed only for certain reasons and proper documentation is necessary. Deferrals must be suspended for six months following a hardship distribution.
Even with the best intentions, mistakes in plan operation can still happen. Often, a mistake can be corrected easily, without penalty and without notifying the IRS. If you are concerned about the possibility of a plan operation mistake, please feel free to call me.