As a sponsor of a 401(k) plan, you’re not trying to break the rules—the opposite, you have the best intentions for your employees. You’re offering a benefit that protects their futures!
But as I recently shared on The 401(k)ouple Podcast, most mistakes don’t come from bad actors. Good people make them—often because they don’t realize their system or thought process is missing a vital piece.
Let’s count down the top 3 mistakes I saw during this past audit season—ending with the most critical—so you can correct these common oversights before they show up on your annual audit.
#3 – Treating technology like it’s infallible
Between payroll systems, recordkeepers, and a deluge of AI tools, it’s tempting to believe, “If the system lets me do it, it must be okay.”
🛑 Think again!
We see this error especially with Secure 2.0 changes around Roth catch-up contributions for highly compensated employees (HCEs). Some payroll providers will happily let employees defer both regular pre-tax and “catch-up” from Day 1. Sounds innocent enough, right?
The problem? By law, a dollar only becomes “catch-up” after a participant hits the regular deferral limit (or a lower plan-specific limit). Systems that treat the first $7,500 of the year as “catch-up” just because someone coded it that way are wrong—full stop.
That mismatch between what the law says and what the system allows is how you get:
- Misreported contributions
- Double-taxation nightmares in later years
- Painful and expensive corrections
Key takeaway
Automation is helpful—but it’s not a substitute for human oversight and alignment with the plan document. This is one area you want to pay a little extra attention to well before the audit.
For a deeper dive on catch-up contributions, check out: Catch-up contributions for high earners.
#2 – Mangling compensation and true-ups
The fact that about 75% of the audits Cassell Plan Audits performs include a compensation definition error should make every plan sponsor sit up and take notice.
The stories I shared in the interview are all too common:
- Teams leave manual checks, bonuses, or special payments out of plan compensation, even though the plan document says they should be included.
- Or conversely, a particular pay type (such as bonuses, commissions, overtime, or similar items) is included when the plan document says it should be excluded.
- True-up calculations based on the wrong pay periods or including compensation earned before eligibility.
For 401(k) plans that offer an employer match and calculate it per pay period, but define the match requirement on an annual basis, true-ups exist to ensure fairness, in cases where the employee didn’t receive the full maximum match because they hit the IRS contribution limit early or had fluctuating paychecks. But if the underlying data is wrong, the true-up becomes another way to be consistently wrong, at scale.
From deferrals and match to testing and corrections, nothing works right if compensation isn’t defined and implemented correctly.
Key takeaway
“Comp” is not a casual HR term—it has a technical definition that must line up across your plan document, payroll codes, and recordkeeper/TPA setup.
For best practices on preventing compensation discrepancies, check out: Review BEFORE the audit: not every income type is the same and What to do if you make an eligible compensation mistake.
#1 – Believing you’ve offloaded fiduciary responsibility
The most dangerous mistake I see is this:
✅ “We hired a 3(16) fiduciary, a great TPA (third-party administrator), and an auditor. We’re covered.”
Or:
✅ “We joined a PEP/PEO, so they’re responsible now.”
🛑 Nope. Most plan sponsors are genuinely shocked to learn that you can delegate tasks, but you can’t delegate responsibility.
Even if someone else is signing your Form 5500 or managing your plan, ultimately, the buck stops with you. I’ve witnessed plan sponsors who:
- Get the same audit findings, year after year
- Shrug and say, “You’ll probably find the same issues next year”
- Assume that because a TPA and an auditor are both involved, everything must be fine
Meanwhile, basic document provisions aren’t being followed. Errors snowball. And when a new advisor or TPA finally points out the problems, they’re the ones who get fired…!
“Years ago, we had a doctor’s group in the Denver area. Most participants had multiple advisors at different broker-dealers within their 401(k) plan,” Christopher Tipper, one of the hosts of 401(k)ouple shared. “The primary owner of the practice, the plan sponsor, looked me square in the face and told me, in all sincerity, ‘That’s private stuff. I can’t know what they’re doing.’ He didn’t like my answer, and fired us shortly after.”
You can’t turn a blind eye to the plan you sponsor, because ultimately you’re responsible. Here’s the hard truth:
You are a fiduciary for hiring and monitoring your experts. The DOL and IRS still see you as the responsible party.
Key takeaway
The buck stops with the plan sponsor. Your job isn’t to do everything yourself—it’s to understand enough to ask questions, notice patterns, and act when something’s off.
For a deeper dive, check out Understanding your fiduciary responsibilities as a 401(k) plan sponsor.
These three themes—overtrusting tech, mishandling comp, and assuming “someone else has it”—are where many plans quietly drift into trouble. If you suspect that your plan may have some vulnerabilities in these areas, consider us a resource! And entrust your next 401(k) plan audit to a firm that partners with you and your TPA to help keep your plan on track. Contact Cassell Plan Audits today.
Photo by Ann H
