Ellin & Tucker Offices

Is Your 401(k) Plan In Compliance?

By: Jared A. Rosen, CPA

Employee Benefit plans in general and specifically 401(k) plans have become our most significant retirement vehicle, with over 60 million people participating in approximately 500,000 plans throughout the U.S.  Their importance has led the IRS to focus on plan regulatory compliance.  As part of this initiative, 1,200 randomly selected Plan Sponsors were surveyed to assess the compliance levels of and risk factors related to this type of retirement plan.  The IRS will use the final results to design future compliance enforcement efforts and will release an updated Questionnaire Self Audit Tool (QSAT) later in 2013.

Prior to the release of QSAT, Plan Sponsors can still perform an internal analysis of their plan operations by using the existing IRS 401(k) Fix-It Guide. This guide lists the most common compliance mistakes in the operation of 401(k) plans, how to find the mistake, fix it and how to avoid the mistake in the future.  The 12 most common mistakes listed in the guide are:

  • The plan document has not been updated for recent law changes
  • Failure to follow the terms of the plan document
  • Not using the plan definition of compensation
  • Incorrect employer matching contributions
  • Failure of  non-discrimination testing
  • Improper exclusion of eligible employees
  • Elective deferrals were not properly limited to IRS maximums
  • Untimely remittance of employee deferrals
  • Participant loans don’t conform to IRS regulations
  • Improper hardship distributions
  • Failure to make necessary top-heavy contributions
  • Failure to file a 5500 and distribute a summary annual report

If an operational error in your plan is discovered, the IRS has a system of correction programs that may be used to correct operational failures in a qualified plan.

In my experience as a benefit plan auditor, I’ve encountered each of these compliance issues and usually, the earlier an error is identified, the easier it is to fix. That is why it is important for Plan Sponsors to review the plan document as well as IRS and Dept. of Labor regulations regarding the administration of their benefit plan on an annual basis.

The IRS 401(k) Fix-It Guide website link is: http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf



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