And Avoiding 401(k) Plan Errors
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.
IRS recently issued this list of 11 potential errors:
Has your 401(k) plan document been updated within the past few years to
reflect recent law changes?
Are the plan's operations based on the terms of the plan document?
Is the plan's definition of compensation for all deferrals and
allocations used correctly?
Were employer matching contributions made to all appropriate employees
under the terms of the plan?
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.
Were all eligible employees identified and given the opportunity to
make an elective deferral election?
Are elective deferrals limited to the amounts allowed under the tax
code for the calendar year and have any excess deferrals been
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
If the 401(k) was top-heavy (favoring highly compensated executives),
were the required minimum contributions made to the plan?
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.
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 adviser 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.
you have a question call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856)
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