It’s common for plan administrators, especially new ones, to make the occasional error while managing a 401(k) plan. While correcting 401(k) contribution errors can easily be done, it is important to remember that these mistakes can also lead to penalties, liability issues, or in the worst cases plan disqualification. To help avoid these penalties let’s learn more about the common types of 401(k) contribution errors and how to correct them.
Find the Right Retirement Plan for You! Check Out Our Infographic
Incorrect Contributions from Employers
There are a few errors that the employer can make when it comes to 401(k) contributions. The employer could miscalculate the percentage of matching contributions or not follow all the terms in the plan and IRS guidelines. The easiest and most efficient way to go about correcting these errors is to keep records of the company’s plan guidelines, employment records, and payroll reports. Once the error has been identified and the correct matching contribution has been figured out, then the employer must make a corrective contribution to the plan. For example, if the employer was supposed to contribute 3% to the employee’s plan, but only contributed 1%, then the employer must make a corrective contribution of the missing 2% plus any missed gains/interest that would have occurred.
Excess Contributions by Participants
Like most retirement plans, 401(k) plans have a yearly contribution limit for the participant. Excess contributions can affect the employer and incur additional taxes. If a participant contributes too much to their 401(k) the employer has 2.5 months after the end of the plan year to reimburse the excess amount to the participant. If this error is not corrected within 12 months of the end of the plan year the plan must use the Voluntary Correction Program (VCP). This program can be very costly for the participant, plan administrators, and the employer. A great way to ensure that this error does not happen is to make sure the participant is aware of the current year’s contribution limits.
Late Contributions
Late contributions can lead to lost gains for participants, so it is especially important that employers correct the issue as soon as possible. Late contributions could also lead to penalties, excise tax, and even disqualification of the 401(k) plan (this is a last resort by the IRS). The first thing that needs to be done to correct this error is to deposit the missing money into the participant’s account. This can be done through self-correction, without reporting to the IRS, if the error is small and quickly fixed. Larger errors will need to be reported, however. As part of the self-correction program, the employer will need to pay excise taxes of 15% on the late deposit amount and report it on Form 5330.
These are just three of the most common contribution errors that can occur with a 401(k) plan, but there are many more less common errors that can occur. Correcting 401(k) contribution errors can seem intimidating, but correcting is a lot less costly than the fees and penalties that can occur if not corrected. The best way to avoid having to correct these errors altogether is to know the details of your 401(k) plan and the guidelines set by the IRS. California Pensions is here to help you understand the details of your 401(k) plan and to help with correcting the errors that may occur. Contact us today to learn more about our services.
