Put simply, a retirement plan helps employees save money for retirement. However, 401(k) errors can jeopardize your plan’s tax-favored status. Despite your best intentions, different plan errors can happen.
The good news is that you can correct the errors if your plan isn’t being audited and you’ve discovered the error on your own. For 401(k) profit sharing or other qualified plans the deadline for self-correction is before the end of the second plan year after the failure occurred, or substantially corrected (click here for the IRS explanation) within that same period.
Mistake 1: You haven’t updated your plan documents to reflect recent law changes.
Find the mistake by reviewing this annual cumulative list of required law changes.
Fix the mistake by adopting amendments for any missed law changes. Note: If you missed the deadline to adopt an amendment, you may need to use the IRS correction program.
Mistake 2: You didn’t base the plan operations on the terms of the plan document.
Find the mistake by conducting an independent review of the plan document provisions compared to its operations.
Fix the mistake by applying reasonable correction methods that would place affected participants in the position they would have been in if there had been no operation plan defects.
Mistake 3: You didn’t use the plan definition of compensation correctly for all deferrals and allocations.
Find the mistake by reviewing the plan document definition of compensation used for determining the following and then review the plan election forms to make sure they are consistent with plan terms:
- Elective deferrals
- Employer non-elective and matching contributions
- Maximum annual additions
- Top-heavy minimum contributions
Fix the mistake by making corrective contributions or distributions.
Mistake 4: The employer matching contributions weren’t made to all appropriate employees.
Find the mistake by reviewing the plan document to determine the employee eligibility requirements and matching contribution formula. Compare it to what is used in the operations.
Fix the mistake by applying a reasonable correction method that would place the affected participants in the position they would have been in if there had not been operational plan defect(s).
Mistake 5: The plan failed the 401(k) Actual Deferral Percentage and Actual Contribution Percentage nondiscrimination tests.
This refers an annual test that 401(k) plans must conduct to ensure that the amount of contributions made by and for rank-and-file employees are proportional to the contributions made for owners and managers (click here for IRS explanations).
Find the mistake by conducting an independent review to make sure that highly and non-highly compensated employees are properly classified.
Fix the mistake by making qualified non-elective contributions for the non-highly compensated employees.