401(k) Plan Administration Pitfalls

Business Owners often weigh the pros and cons of offering many types of employee benefits, from health care coverage to weekly lunches. On one hand, many of these benefits are crucial to the health and happiness of your employees. On the other, managing a health care plan adds administrative burden and requires some understanding of the health care system. The same goes for sponsoring a qualified retirement plan. We’re often asked what trouble exists for missing key tasks and deadlines associated with a 401(k) plan, so we’ve compiled a list of errors we find most often.


The number one mistake made, which can spin off into a number of other errors, is simply not following the rules laid out in the plan document. The plan document is the operating manual for the retirement plan.  Failure to follow the plan’s provisions can cause the plan to lose its qualified status and tax benefits.

401(k) Plan Compliance Failures

Contributions (Employee and Employer)

  • 401(k) Plans with fewer than 100 participants must deposit salary deferrals withheld from participants’ paychecks no later than 7 business days following each and every pay date. For larger plans, deposits should be made much sooner (generally within 2-3 business days at the most).
  • Miscalculating employer contributions – these must be calculated and/or allocated according to the formula set forth in the plan document. In the case of an employer match, the contributions must be based on an employee’s salary deferral percentage.
  • There are limits to the amount participants can defer from their salary each year, the salary considered for calculating the employer contribution, and the total contributed by the employer. The limits are set annually. If these limits are exceeded, the contributions must be corrected.

Eligibility, Entry Dates, & Enrollment Pitfalls

  • We often find that employees who have become eligible to participate in the plan are not given the opportunity to begin making contributions to the plan after meeting the 401(k) plan’s eligibility requirements. This results in a missed deferral opportunity and must be corrected. The correction method requires the employer to make a contribution on behalf of the employee who was not allowed to make salary deferrals.
  • Another issue we’ve noticed is that employers and administrators assume that the plan can exclude part-time employees from participating in the plan. However, regulations state that once an employee meets the plan’s eligibility requirements (maximum requirement allowed is 21 years of age and 1,000 hours of service in a 12 month period) they must be allowed to participate in the plan.
  • Understand the difference between the date that an employee meets the eligibility requirements of the plan and the date the participant actually enters the plan (eligibility date vs. entry date.) Your plan document will dictate the actual date the employee enters the plan and may contribute to the plan. This date generally is a date following the date upon which the employee meets the plan’s eligibility requirements.


  • The 401(k) plan document describes employees’ rights to the contributions made by the employer for the employee’s benefit. This is called their vested balance. Each plan chooses a vesting schedule to follow and decides how it will measure years of service for vesting. A participant’s vested balance (or the amount he or she is entitled to receive if he or she leaves employment) will be based on that schedule and the participant’s years of service for vesting. Misunderstanding these rules commonly leads to mistakes when calculating a participant’s vested balance and making a distribution to him after termination of employment.
  • Proper compliance requires maintaining accurate service records for all employees, not just those employees who participate in the plan. If the service records are incorrect or incomplete, the benefits provided to employees may be incorrect, and errors can lead to the disqualification of the plan.

Reemployment Rules

  • It is important to know when an employee that you have rehired becomes eligible to participate in the plan. Many times they are eligible on the day they are rehired.  Generally, all of the employee’s service prior to their termination of employment must be recognized and credited for purposes of eligibility and vesting.

Forfeiture Accounts

  • The retirement plan regulations do not allow a 401(k) plan to maintain a “suspense” account indefinitely. Therefore, any funds in the forfeiture account must be disposed of in the year they are forfeited or the following year. You must check your plan document to see how you are allowed to use your forfeiture account.

Definition of Compensation

  • Your 401(k) plan document includes a definition of compensation which must be followed. Many times plan sponsors assume that certain things are excluded from compensation, such as bonuses. We often hear from clients that they have not withheld salary deferrals from bonuses or that they assumed contributions were solely based on an employee’s base pay amount. However, this is rarely the case. Be sure that you know how your plan defines compensation and how the definition is properly applied. Correcting errors in contribution calculations because of a misunderstanding regarding compensation can be costly to the plan sponsor.


  • After terminating employment with the plan sponsor, a participant may withdraw all or a portion of their vested account balance. Make sure someone on your team understands your plan’s vesting requirements and is reviewing your distributions before they are paid out. If too much is paid out to a participant, it is unlikely they will return the money, and the plan sponsor will have to repay the plan.
  • The timing of distributions is also a common mistake. Some plans allow for distributions to take place the plan year following the year of termination. Other plans allow for distributions as soon as administratively feasible following severance of employment. Make sure you check your plan document and follow the terms of the plan.
  • Hardships distributions are only allowed for specific purposes and require substantial evidence proving a hardship occurred. First, make sure the plan document allows for hardship distributions. If it does, you must then ensure that you get the proper documentation and retain it for your records. The participant must also cease making contributions to the plan for 6 months following the hardship distribution. It is always advisable to seek help from an expert in retirement plan rules and regulations. A plus of having compliance consultant by your side when hardship distributions arise is the compliance consultant is usually the one to review and the provided documentation of the hardship, making them the “bad guy” if they find a hardship has not occurred based on the evidence provided by the participant.
  • Upon attainment of age 70.5, certain retirement plan participants may have to take a required minimum distribution (RMD) from the plan each year. These participants must begin taking their RMDs no later than the April 1 following the year they turn 70.5. If they wait until the April 1st of the year after they turn 70.5, they will be required to take two RMDs that year. Each year thereafter, they will be required to take another RMD no later than December 31st. If participants or beneficiaries do not receive their minimum distribution on time, they are subject to a 50% penalty on the underpayment.

Other steps Plan Sponsors can take to ensure their plan stays out of trouble.

  • If you are going to turn the internal administration of the plan over to someone in accounting or human resources, make sure they have the knowledge and proper training to handle the job. Make sure they understand the importance of their duties. They are not something to be taken lightly.
  • Lean on your compliance consultant/TPA. Don’t ever be afraid to call and ask questions. It is always better to ask first than to have to correct something later. At TriStar, we have never heard a silly question from a client. Our clients hire us to be their experts so they don’t have to.
  • Make sure you know who to ask. If you have a question about investments, ask your investment advisor. If you have a technical question about the terms of your plan, such as eligibility, what types of distributions are allowed, or what is the definition of compensation in your plan, ask your compliance consultant/TPA. Make sure you know which services each member of your team provides for you and what area they are an expert in.

If you’re considering offering a 401(k) plan, or if you’re concerned about the qualified status of your plan, give us a call! We can help you weigh your options and assist you in designing a plan that fits your goals while taking the heavy lifting of the administrative burden off your plate!

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