12 Tips for Avoiding Common 401(k) Plan Compliance Errors
posted Dec 3, 2014 by Anthony Mangiarelli, CPA in the Business Blog
401(k) retirement plans offer valuable tax benefits to both employers and employees, but employers must comply with significant requirements related to plan design and operation. Noncompliance can lead to plan disqualification and, in turn, negative repercussions including:
- Loss of tax deductions for employer contributions.
- Taxes assesed on the plan’s investment earnings (as well as penalties and interest).
- Penalties for failure to remit income tax withholding on contributions reclassified as employee income.
How can you avoid costly compliance errors with your plan? One way is to take advantage of the IRS’s recently updated 401(k) Plan Fix-It Guide. The guide offers tips on how to find, fix and avoid 12 common mistakes. The common mistakes involve failing to:
- Update the plan every few years to reflect changes in the law
- Base the plan operations on the plan document’s terms
- Use the plan definition of compensation correctly for all deferrals and allocations
- Make matching contributions to all appropriate employees
- Pass the 401(k) actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination tests
- Give eligible employees the opportunity to make an elective deferral
- Limit elective deferrals to the applicable amounts for the calendar year and distribute excess deferrals
- Timely deposit elective deferrals
- Conform participant loans to the plan document requirements and Section 72(p) of the Internal Revenue Code
- Properly make hardship distributions
- Make required minimum contributions in a top-heavy plan (meaning the total of “key employee” accounts exceeds 60% of all accounts)
- File a Form 5500 series return
The guide also provides an overview of the rules for 401(k) plans and the IRS’s Employee Plans Compliance Resolution System.
Employers with 401(k) plans should review their plans for the Top 12 mistakes. We can help you identify these and other mistakes and implement appropriate controls and procedures to preempt them going forward.
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