With 2024’s audit season a none-too-distant memory, it’s time to look back at the top 3 errors on 401(k) plan audits we saw our clients make last year… So you can prevent them from showing up during your next benefits plan audit!
Since we specialize in 401(k) plan audits and 401(k) plan audits alone, we complete hundreds of audits each year. So, we’ve truly seen it all!
Unfortunately, this includes seeing the same mistakes made repeatedly across clients and industries. The first two errors are no exception; they also appeared on last year’s list.
Error #1: Missing Documentation
Keeping track of 401(k) records might seem like a no-brainer—you document everything, right? And yet, this mistake arises every year during audit season.
So, pause and take a step back. Can you easily pull up verifiable, time-stamped documentation for every employee account change made this year? (Say that ten times fast).
Think about it: Has your company experienced any of these situations? Or do you anticipate any of these happening this year?
- Switch to a new payroll provider or software to manage 401(k) plans
- Go through a merger, sale, or acquisition that affected plan participants
- Move headquarters, offices, or facility where you store your records
- Transition to digital record-keeping
- Purge old records, potentially losing data on former employees who still have account balances… and, therefore, still count toward your audit
Each of these changes can create small but critical gaps in your documentation. Even the most experienced plan sponsors can overlook something. The key? Stay proactive and make sure your records are airtight before any issues arise.
Error #2: Misclassified Compensation
Handling 401(k) contributions sounds straightforward—until things like bonuses and off-cycle payrolls throw a wrench in the process. A common issue? Not treating special income (like bonuses) correctly when calculating employee withholdings and company matches.
Here’s how it happens: Your benefits policy says bonuses count as regular compensation, meaning you should include them in 401(k) contributions. But if payroll didn’t factor that in—and your company didn’t match contributions accordingly—you’ve got a problem.
And here’s the kicker: Employees probably won’t catch the mistake, but regulators might. (Your 401(k) plan auditor almost always will.) This error leaves your business on the hook for making up the shortfall—and possibly facing penalties.
The fix? Double-check that every type of pay (bonuses, extra pay runs, special incentives) is coded correctly from the start. If an error has already happened, don’t stress—we’ve got you covered with the next steps to get things back on track.
Error #3: Vesting Errors
Vesting an employee for your 401(k) plan might seem simple—until you throw commissioned or salaried employees into the mix. One of the most common mistakes? Using hours worked to track vesting when certain employees (like sales staff on commission) hardly log hours or don’t log them at all.
Here’s how it happens: Your 401(k) plan requires employees to work a minimum number of hours per year to earn vesting credit. However, since commissioned or salaried employees often don’t track hours, the system registers them at zero hours worked—meaning no vesting credit. Suddenly, you’ve got employees who should be earning their 401(k) match, but on paper, they’re getting nothing.
This error happens a lot in car dealerships and other commission-heavy industries, and it can lead to compliance issues—not to mention some very unhappy employees.
The fix? Make sure your vesting policy accounts for all employee types. Many plans allow vesting based on service time instead of hours worked, which helps avoid these gaps. If your plan still relies on hours, it might be time for a review to keep things fair—and compliant.
Next Steps
So, there you have it—the top 3 errors on 401(k) plan audits in 2024.
If none of these ring a bell, congratulations! You are ahead of the game.
If any of these errors sparked an area you might need to investigate… Also congratulations! Better known than unknown. You have plenty of time to get things in order before your next 401(k) plan audit.
To get your ducks in a row, here’s a handy checklist to avoid errors and prepare for your next 401(k) plan audit.
Consider us a resource and your compliance partner. Need help on your next benefits plan audit? Ready to work with the friendliest auditor team around? Contact Cassell Plan Audits today.
