April, 2012
Identifying Compliance Errors in a 401(k)
Given the complexity of 401(k) plans, mistakes are made even when plan sponsors try to follow the letter of the law. The Internal Revenue Service (IRS) maintains several correction programs, as well as a 401(k) Plan Fix-It Guide, that can help plan sponsors determine whether their procedures adhere to IRS requirements, and if a sponsor discovers an error, how to amend the situation.
During an IRS conference call on March 6, 2012, Director of Employee Plans Examinations Monika Templeman mentioned several mistakes that could disqualify a 401(k) plan. (1)
• Failure to amend written documentation when tax laws change.
• Failure to maintain materials such as the original plan document, IRS opinions, amendments, and others.
• Failure to document actions taken by the board of directors.
• Failure to comply with a plan’s definition of compensation.
• Failure to follow laws relating to eligibility and repayment periods for 401(k) plan loans.
• Failure to make matching contributions to eligible employees or making contributions to employees who are not eligible.
Note that this list is not all-inclusive, and it is important to conduct an annual review to ensure that your plan adheres to regulations imposed by the IRS and the U.S. Department of Labor.
The 401(k) Plan Fix-It Guide prompts sponsors to ask themselves several questions in an attempt to determine whether their plans are compliant: (2)
• Has your plan document been updated within the past few years?
• Do the plan’s operations follow the terms stipulated in the plan document?
• Is the plan correctly applying the definition of compensation when determining deferrals?
• Has the plan satisfied nondiscrimination tests?
• Were all eligible employees given the opportunity to make elective deferrals?
• Are elective deferrals limited to the amounts stipulated by federal law?
• Were matching contributions made to the appropriate employees?
• Does the plan deposit deferrals as soon as they can be segregated from corporate assets?
• Do participant loans conform to the plan documentation and also to federal laws?
• Were correct procedures followed for hardship withdrawals?
If these or other questions reveal a mistake, you can contact your tax advisor or get in touch with the IRS directly. A mistake does not automatically mean that a severe penalty will be levied. According to the IRS 401(k) Plan Checklist, depending on the situation, many errors can be corrected easily and without notifying the IRS.
Source/Disclaimer:
1 - Source: hr.cch.com, “Failure to Amend Among Top Compliance Problems for 401(k) Plans, IRS Reports,” March 22, 2012.
2 - Source: U.S. Internal Revenue Service, 401(k) Plan Checklist.
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© 2012 S&P Capital IQ Financial Communications. All rights reserved.
April 2012 This column is produced by the Financial Planning Association, the membership organization for the financial planning community. It has been modified and is provided by Thomas A. Fisher, a local member of the FPA.
The material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your own adviser prior to implementation in order to determine whether the strategies mentioned are appropriate for your specific situation.