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Common 401(k) Plan Administrative Mistakes | Resources | Fisher Investments

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This quick reference offers some of the most common mistakes than can happen when administering a 401(k) plan and what can be done to fix them. Plus, you’ll learn the top 5 ways to avoid administrative issues all-together. 

How to Address and Avoid Errors

 

As a fiduciary, you are required to handle your 401(k) plan administrative responsibilities with diligence, consideration, and prudence. Failure to do so may result in personal liability, tax penalties, or even plan disqualification, meaning the plan could lose its 401(k) tax deferred status.

Errors are typically caused by administrative or operational oversight. Some examples may include: making late or excessive plan contributions, failing certain testing, failure to follow the plan document, and failing to file the Form 5500 on time.

Go to www.irs.gov/pub/irs-tege/401k_mistakes.pdf for more information on common mistakes.

How Do I Correct a Problem?

 

The Department of Labor (DOL) and Internal Revenue Service (IRS) provide many ways to correct errors depending on the type of problem. Some corrective measures include:

  • Self-Correction Program (SCP)
  • Voluntary Correction Program (VCP)
  • Delinquent Filer Voluntary Compliance Program (DFVCP)
  • Audit Closing Agreement Program (Audit CAP)
  • Voluntary Fiduciary Correction Program (VFCP)

Common Errors and Remedies

 

Knowing and taking your responsibilities seriously is important; the consequences for negligence can be both expensive and bothersome. Thankfully, the DOL and IRS offer explanations of what these mistakes are, how to avoid them, and how to fix them. Following are three examples and how to remedy them.

Late Contributions What it is: An operational error committed when an employer fails to contribute participant deferrals to the Plan Trust in a timely manner
Who is affected: The Plan
Participant account
What can happen: Plan disqualification
Financial penalties
Remedies:

Deposit late contributions and lost earnings

File Voluntary Fiduciary Correction Program (VFCP) documents

  • Report late contributions on Form 5500
  • Pay excise tax to IRS and file Form 5330

Establish procedures to prevent future late deposits

Excess Plan Contributions What it is: When the Plan fails ADP or ACP testing, or participants contribute/benefit too much
Who is affected: Employer
Highly compensated participant accounts
What can happen: Plan disqualification
Additional taxes
Remedies:

Pay excess contributions to affected employees within 2 1/2 months following plan year end (PYE)

Fund a Qualified Non-Elective Contribution to Non- Highly Compensated Employees

Pay excess contributions to affected employees within 12 months following PYE and pay excise tax (Form 5330)

Failure to Timely File Form 5500 What it is: When the plan sponsor fails to file the Plan’s yearly Form 5500 or request a filing extension within 7 months of PYE
Who is affected: The Plan
What can happen: Financial penalties
Remedies:

Request an extension (IRS Form 5558) before the deadline and submit filing by the extended deadline

File IRS Form 5500 under the DFVCP

Pay a fine


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