In an effort to assist other retirement plan sponsors in complying with the various regulations regarding the operation of a 401(k) plan, the Internal Revenue Service (“IRS”) has provided on its website a list of the top ten issues/plan mistakes encountered by the IRS during its compliance activities.
The most common error we have encountered, which is included in the list, is the late deposit of employee 401(k) deferrals. Rules published by the Department of Labor (“DOL”) require employers to deposit employee salary deferrals into a 401(k) plan “as of the earliest date on which such amounts can reasonably be segregated from the employer's general assets,” but in any event, not later than the 15th business day of the month following the month in which such amounts would otherwise have been payable to the employee in cash. Unfortunately, however, many employers have misinterpreted the DOL rule and believe that they can delay deposit until the 15th business day of the following month, regardless of whether amounts could have been segregated on an earlier date. With modern electronic payroll systems, in most cases, amounts can be segregated on the same day or within a few business days. In those situations, the deposit must be made immediately and cannot be delayed. The failure to deposit salary deferrals on a timely basis must be reported on the Form 5500 and constitutes a prohibited transaction requiring the employer to compensate employees for lost earnings and necessitating the filing of a Form 5330 and the payment of an excise tax under the Internal Revenue Code (“Code”).
Other common errors include the improper exclusion of eligible employees for purposes of ADP and/or ACP testing, misclassification of highly and non-highly compensated employees for purposes of ADP and/or ACP testing, failure to correct or timely correct ADP and/or ACP failures, incorrect employer matching contributions, deferrals in excess of Code Section 402(g) limits, the inclusion of failsafe provisions in a 401(k) safe harbor plan, failure to meet hardship distribution requirements, improper 401(k) accelerated deductions and failure to use correct compensation.
The complete list is available at http://www.irs.gov/retirement/article/0,,id=135260,00.html along with a discussion of the errors and the possible consequences to the plan and the employer.
Understanding that mistakes occur, the IRS and the DOL have been very active in providing employers tools and information to assist them in correcting plan mistakes and failures thereby ensuring that the plan remains compliant with the applicable rules and regulations. If you believe that a failure or mistake may have occurred, one or more of these programs may be available to you.