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Don’t suffer from 401(k) Compliance in 2019? Avoid These 5 Mistakes.

February 2019

Many companies continue to make 401(k) compliance mistakes, often unknowingly, and some being simple payroll mistakes that happen multiple times a year.  If left unfixed, these very mistakes can have some serious and costly ramifications, both in terms of compliance risk, as well as additional & needless work during your annual audit.  Fortunately, they are not impossible to avoid.  Here are 5 of the biggest 401(k) compliance mistakes we see plan sponsors make that can be avoided or diligently corrected.

1. Missed Deferral Opportunity

A missed deferral opportunity (MDO) occurs when an eligible employee intends to make a deferral, but an administrative error prevents them from doing so.  Fixing missed deferral opportunities can be really expensive. When these occur, you may have to compensate the employee for the amount they would have deferred, the employer match they would’ve been credited, and potentially the investment gains that would have resulted had the deferral been made on time.  So, as you can imagine, the longer time goes by for these to accumulate, the more costly they can be.  Make sure you have an established process in place that avoid this from happening as well as backup solution that can catch the error before much time passes, therefore limiting your potential liability.

2. Late Deposits

Late deposits are one of the most common errors that are discovered usually during the annual 401(k) audit.  The Department of Labor (DOL) mandates that 401k deposits must be made “as soon as administratively feasible.”  The DOL also indicates that this time limit can be further defined based on the pattern of how quickly you have demonstrated to make these deposits over time in the past.  If auditors determine that you have not made these deposits as soon as possible or as quickly as your pattern of deposits has indicated in the past, you potentially could be made to compensate your employees for earnings they would have had if the deposits had been made on time.  This could require you to file Form 5330. Don’t we have enough forms to file already?

3. Invalid Deferrals

When an ineligible employee is accidently enrolled in the 401(k) plan, that is considered an invalid deferral. When this happens and some of an employee’s paycheck is withheld and deposited into the plan, you will have to run a payroll reversal with the recordkeeper to refund the withholding to the employee.  Luckily, there is not currently a compliance penalty for invalid deferrals; they are basically just an administrative pain.  However, if the error is not discovered right away or if processing the correction takes too long, the employee can become unhappy with the company.  This often results in a complaint being filed with the DOL, which could potentially trigger an audit.

4. Defaulted 401(k) Loan

This mistake can be frustrating but more importantly be very expensive.  If a participant’s loan goes into default as a result of you not setting up the repayment withholdings properly or not at all, your company could be responsible for paying back the entire loan amount as a distribution.  The participant may be responsible for the 10% early distribution penalty, but after paying that, they get to keep the amount of the loan that the company had to pay out to them as a result of the repayment error.  Essentially, they get free money while your company pays back their loan.  One that might be perceived as a nice gesture by the participant, but one that could be expensive, so you and the company should have safeguards to avoid it.

5. Failure to Send Notice

This final mistake is not often caught, but it can get you in big trouble.  At certain times of the plan year or after certain plan events, there are certain notices that have to be sent.  These are notices like the QDIA notices, eligibility alerts, and summary annual reports. If they are not sent out on time, or not sent out at all, even worse, that could mean big fines if the DOL audits your plan.  Check and make sure you supply your recordkeeper with current up-to-date census data and implement a process for ensuring and documenting that these types of required notices are sent out on time.


Although there are other mistakes that could increase company liability, these are 5 of the most common mistakes dealing with 401(k) plan compliance that plan sponsors should avoid. If you would like to learn more about how to avoid these mistakes and implement processes to assure that these mistakes are not something that you have to worry about, contact us today.