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401(k) Plan Checklist Finding, Fixing and Avoiding Mistakes

It is important that plan sponsors review the requirements for operating their 401(k) retirement plan regularly to avoid common errors that can happen along the way. The partial checklist below will help the plan sponsor keep their plan in compliance with many of the important rules and its plan document.

Has the plan document been restated?

To reflect law changes, the plan needed to be amended. Pre-approved defined contribution plans adopted prior to January 1, 2016, needed to have its plan document properly amended and executed by April 30, 2016.

Are the plan’s operations based on the terms of the plan document?
Failure to follow the terms of the plan document is a common problem encountered in an audit. Plan sponsors and administrators should perform an independent review of the plan’s provisions annually.

Is the plan’s definition of compensation for all deferrals and allocations used correctly?
Because the plan may use different definitions of compensation for different purposes, it’s important that the plan sponsor apply the proper definition according to their plan document.

Were employer matching contributions made to all appropriate employees under the terms of the plan?
The terms of the plan must be followed when allocating employer matching contributions.

Has the plan satisfied the 401(k) nondiscrimination tests (ADP and ACP)?
Every 401(k) plan must satisfy yearly ADP/ACP nondiscrimination tests except for certain 401(k) safe harbor plans. Automatic enrollment and yearly automatic deferral increases can alleviate testing failures.

Were all eligible employees identified and given the opportunity to make an elective deferral?
By supplying the plan administrator with information regarding all employees who receive a Form W-2, and reviewing the plan document’s eligibility requirements the plan sponsor can reduce the risk of omitting eligible employees.

Are employee elective deferrals deposited in a timely manner?
The sponsor should deposit deferrals as soon as they can be segregated from the employer’s assets.

Are elective deferrals limited to the amounts under the Internal Revenue Code?
Failure to distribute excess deferrals can result in additional taxes and penalties to the employee and employer.

Were benefit distributions made in the correct amount, at the correct time, with proper withholding and in the correct form?
Benefit distributions must be determined in accordance with the plan document.

Has the plan administrator provided the plan participants with the required plan-related and investment-related information?
The plan administrator must provide to participants fees and expenses quarterly and all information annually.

Do participant loans conform to the requirements of the plan document and the Internal Revenue Code?
Defaulted loans or loans in violation of the IRC may be treated as taxable distributions to the participant.

Were hardship distributions made properly?
If a plan allows hardship distributions, the terms of the plan must be followed.

Were top-heavy minimum contributions made?
If the plan is top-heavy, minimum contributions for non-key employees and/or cliff vesting may be required. Automatic enrollment can help alleviate the need to make top-heavy minimum contributions.

Was form 5500 filed?
401(k) plans must make an annual filing with the federal government.

Remember: this checklist is not a complete description of all plan requirements and should not be used as a substitute for a complete plan review. If you are not sure if your plan is being managed properly, schedule a plan review immediately.

(Copyright Internal Revenue Service)