It is critical to keep your company’s 401(k) plan in compliance with numerous federal laws and regulations. Plans that are found to be in violation risk expensive penalties and disqualification.
The IRS recently issued this list of 11 potential errors:
1. Has your 401(k) plan document been updated within the past few years to reflect recent law changes?
2. Are the plan’s operations based on the terms of the plan document?
3. Is the plan’s definition of compensation for all deferrals and allocations used correctly?
4. Were employer matching contributions made to all appropriate employees under the terms of the plan?
5. Has your plan satisfied the nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions made by, and on behalf of, rank-and-file employees are proportional to contributions made for owners and managers.
6. Were all eligible employees identified and given the opportunity to make a deferral election?
7. Are elective deferrals limited to the amounts allowed under the tax code for the calendar year and have any excess deferrals been distributed?
8. Have you deposited employee elective deferrals on time? Plan documents generally contain language about the timing of these deposits. There are also federal laws and regulations regarding deposits of elective deferrals, as well as matching employer contributions. Failing to follow the terms of the plan could lead to “prohibited transactions.”
9. If the 401(k) was top-heavy (favoring highly compensated executives), were the required minimum contributions made to the plan?
10. Were hardship distributions made properly? These distributions may be allowed by a 401(k) plan in the event an employee has an immediate financial need, such as medical bills or college tuition.
11. Have you filed a Form 5500 series return with the IRS and have you distributed a Summary Annual Report to all plan participants this year?
Abusive or prohibited transactions can put the tax-favored status of your company’s 401(k) plan in jeopardy and result in expensive penalties.
Keep in Mind: The IRS is not the only government agency overseeing employee benefit plan compliance. The Labor Department’s Employee Benefits Security Administration and the Pension Benefit Guaranty Corporation also scrutinize benefit plans and have their own compliance processes.
The good news is that 401(k) plan errors can often be voluntarily corrected. Your tax advisor or employee benefits professional can determine if changes should be made to your company’s plan to achieve and maintain compliance.
Staying current with numerous complex requirements is challenging for business owners and executives. With professional help, you can identify and correct any problems associated with qualified plans … before the IRS comes calling.