401(k) Plan documents can read like Russian novels. They are often long and difficult to understand, so it’s no surprise that administrative errors in operating such plans happen frequently. Common errors include omitting or including compensation that doesn’t meet the definition in the plan document, failing to enroll a new employee or a rehire on time, and botching participant loans (such as a failure to set up repayment of the loan in payroll on a timely basis or extending the repayment schedule beyond the five-year limit).
Since these errors are common, you might overlook them. All operational errors are qualification errors, which means that ultimately, they could affect the tax-exempt status of your plan. While the IRS no longer disqualifies plans unless the employer refuses to take the corrective action, the IRS has the power to asses large penalties for plan sponsors who make mistakes. In the event of a 401(k) plan audit, the employer finds itself with little to no bargaining position in the negation of how much to pay the IRS to maintain plan qualification.
But there is good news. The IRS has had a correction procedure in place for many years that allows an employer to voluntarily correct almost every mistake – including many plan-document errors. This procedure permits self-correction if the error is corrected within two years after the end of the plan year in which the error occurred (with the exception of an error that relates to a participant loan or a plan-document failure).
Self-correction is also available for “insignificant” mistakes made outside the two-year correction period. Significant mistakes that occurred outside the two-year period or plan document errors must be submitted to the IRS for approval through its Voluntary Correction Procedure (VCP). This procedure is not onerous, but does require a filing fee based on the number of participants in the plan (e.g., $8,000 for a plan with at least 501 participants, but not more than 1000).
The requirements for correction through VCP are: 1) identification of the error; 2) correction of the accounts of all affected participants for all years involved (regardless of whether the year is still open to audit); and 3) submission of the correction to the IRS on the required forms. Limited plan-loan failures can also be corrected through VCP (but cannot be self-corrected).
The beginning of the year is an ideal time for a self-audit of plan administration to ensure that the plan is being operated according to its terms. Even if your plan is required to file an independent audit with the Form 5500, the auditors are not tasked with finding every mistake. That’s the employer’s responsibility. So for the new year, resolve to take a look around. If you see an elephant – don’t ignore it!
For more information contact the author at SFeingerts@laborlawyers.com
Insight
Is There An Elephant In The Room?
401(k) Plan documents are often extremely difficult to understand, and mistakes are common. If you see a mistake don't ignore it, and instead see what options you have to change it.
Trending Articles
Presenting The Best Lawyers in Australia™ 2025
by Best Lawyers
Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.
The 2024 Best Lawyers in Spain™
by Best Lawyers
Best Lawyers is honored to announce the 16th edition of The Best Lawyers in Spain™ and the third edition of Best Lawyers: Ones to Watch in Spain™ for 2024.
Best Lawyers Expands Chilean 2024 Awards
by Best Lawyers
Best Lawyers is pleased to announce the 14th edition of The Best Lawyers in Chile™ and the inaugural edition of Best Lawyers: Ones to Watch in Chile™, honoring the top lawyers and firms conferred on by their Chilean peers.
Best Lawyers Expands 2024 Brazilian Awards
by Best Lawyers
Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Brazil™ and the first edition of Best Lawyers: Ones to Watch in Brazil™.
Announcing The Best Lawyers in South Africa™ 2024
by Best Lawyers
Best Lawyers is excited to announce the landmark 15th edition of The Best Lawyers in South Africa™ for 2024, including the exclusive "Law Firm of the Year" awards.
The Best Lawyers in Mexico Celebrates a Milestone Year
by Best Lawyers
Best Lawyers is excited to announce the 15th edition of The Best Lawyers in Mexico™ and the second edition of Best Lawyers: Ones to Watch in Mexico™ for 2024.
How Palworld Is Testing the Limits of Nintendo’s Legal Power
by Gregory Sirico
Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.
The Best Lawyers in Portugal™ 2024
by Best Lawyers
The 2024 awards for Portugal include the 14th edition of The Best Lawyers in Portugal™ and 2nd edition of Best Lawyers: Ones to Watch in Portugal™.
How To Find A Pro Bono Lawyer
by Best Lawyers
Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.
The Best Lawyers in Peru™ 2024
by Best Lawyers
Best Lawyers is excited to announce the landmark 10th edition of The Best Lawyers in Peru, the prestigious award recognizing the country's lop legal talent.
Presenting the 2024 Best Lawyers Family Law Legal Guide
by Best Lawyers
The 2024 Best Lawyers Family Law Legal Guide is now live and includes recognitions for all Best Lawyers family law awards. Read below and explore the legal guide.
Announcing The Best Lawyers in New Zealand™ 2025 Awards
by Best Lawyers
Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.
The Best Lawyers in Colombia™ 2024
by Best Lawyers
Best Lawyers is honored to announce the 14th edition of The Best Lawyers in Colombia™ for 2024, which honors Colombia's most esteemed lawyers and law firms.
Announcing The Best Lawyers in Japan™ 2025
by Best Lawyers
For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.
