Most shared 401(K) Mistakes
1. Has the plan document been updated within the past few years to mirror recent law changes?
If your plan has not been updated to mirror EGTRRA changes, the plan needs to be revised.
2. Are the plan’s operations based on terms of the plan document?
Failure to follow the terms of the plan is a shared 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 plan’s definition of compensation for all deferrals and allocations used correctly?
Because your plan may use different definitions of compensation for different purposes, it’s 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 shelter 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 spread deferrals in excess of the 402(g) limit may consequence in additional taxes and penalties to the participant and employer. The limit for 2011 is $16,500 and for 2012, it will be $17,000.
8. Have employee elective deferrals been deposited in a timely manner?
You should place deferrals as soon as they can be segregated from the employer’s assets, but absolutely 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 dispensing 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 dispensing.
already with the best intentions, mistakes in plan operation can happen. Often, a mistake can be corrected easily, without penalty and without notifying the IRS.