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Top three 401k plan mistakes made this year (and how they might still affect you)

December 16, 2021

401K Plan Mistakes

You probably already know your 401k plan must satisfy certain plan qualification requirements enforced by the IRS. But what you may not know is that if your plan fails to meet these requirements you, the employer and plan fiduciary, may be subject to personal liability, penalties, and in rare cases, plan disqualification.

Most mistakes are caused by administrative or operational oversight. Depending on the type of problem, The Department of Labor and the IRS provide many programs to correct errors.

Reviewing your plan and updating policies and procedures can help prevent errors. Good documentation helps too. Yet, administrative mistakes can still happen no matter how diligent you are. 

And while most mistakes can be fixed, first they must be found. An annual independent audit is how mistakes can be found, although that is not a guarantee as audits only test a sample of the population, and the sooner they are dealt with, the less painful the process of correction will be.

Remember, audits are not meant to correct errors, and errors are made by people. That is why having a solid compliance system in place is so important to prevent any costly lawsuits and ensure all processes and regulations are followed.

Here are three top mistakes we found in 401k plans this year

  1. Failure to make payroll contributions when salaries were paid from PPP loans

During 2020, many employers took advantage of loans from PPP (Payroll Protection Plan provided through the Cares Act) and other grants to manage their payroll, and in some cases retirement plan contributions. 

However, some companies did not withhold 401k plan contributions and fund respective match contributions, if applicable, while these funds were used to cover their payroll costs. But once you have a 401k plan set up, retirement plan contributions are mandatory, no matter where the funds that cover salaries come from.

  1. Excluding bonuses from compensation to determine 401k plan contributions. 

It is important to review the compensation definitions in your plan. Does your plan definition include commissions, tips, bonuses, or overtime?

In most cases, bonuses are considered part of annual compensation, whether they are distributed once a year, or infrequently based on exceptional performance such as happened in the case of healthcare workers during the pandemic in 2020. Many hospitals found themselves out of compliance.

  1. Using new technology that fails to provide documentation for compliance

Is your new technology leaving important 401k plan adjustments undocumented? If you have adopted new software for your payroll administration or benefits plan administration, it’s important to be sure you are remaining in compliance.

Don’t wait for your annual audit to pick this up. Audits are not designed to catch all errors. Review your records frequently, perhaps even monthly, to be certain that everything is documented, including any changes made in employee contributions.

Waiting to correct errors increases the cost of your mistake

Many mistakes can be corrected without penalty and without contacting the IRS. And if there are penalties, they will be much smaller if handled right away.

This is one good reason to not put off your annual audit until the fall. Why not schedule your audit for May or June, for example, to allow you to correct any errors noted sooner and limit your liability?

And if you know, or even suspect, that your company has made one of these mistakes call Cassell Plan Audits for guidance on the next step. We can help by pointing you in the right direction in terms of corrective programs to remedy the issue.

Don’t wait until the DOL or the IRS is knocking on your door! 

Apply a few preventive measures now. Review your plan frequently, stay in compliance with current laws and regulations, and document everything.

And finally, step up your audit schedule. The earlier you find errors, the sooner you can clear them up. And that can mean big savings for you.  


If you have any concerns about compliance issues, call us now for guidance. Contact Cassell Plan Audits at 630.886.7669 for more information and to schedule your virtual appointment.

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