Update on 401(k) Plan Errors

by King & Spalding

The Internal Revenue Service (“IRS”) recently updated its informal guidance about 401(k) plan errors. The updated materials contain simple guidance that is helpful for both identifying and correcting mistakes and avoiding future errors. The guidance, particularly the “401(k) Plan Fix-It Guide,” is a useful starting point for employers interested in performing compliance audits of their 401(k) plans.

Identifying and Correcting Errors

The “401(k) Plan Fix-It Guide” provides a good checklist of common errors and summarizes the correction process with respect to each error. The most common errors include failure to:

  • Amend a plan to reflect changes in the law
  • Calculate contributions using the plan’s definition of compensation
  • Give eligible employees the opportunity to make elective deferrals
  • Make hardship distributions in accordance with plan document requirements
  • Limit elective deferrals to the maximum under the Internal Revenue Code (“Code”) ($17,500 in 2014)
  • Administer participant loans as required by the plan document and the Code
  • Make required top-heavy minimum contributions
  • Made matching contributions to all eligible employees
  • Timely deposit elective deferrals

Many 401(k) plan errors may be corrected using one of two voluntary correction programs, the Self-Correction Program (“SCP”) (which is generally only for operational failures) and the Voluntary Correction Program (“VCP”). Voluntary, employer-initiated correction likely will be far less costly than IRS-initiated correction under the Audit Closing Agreement Program (“Audit CAP”) following the discovery of an error during a routine IRS audit or an IRS review in connection with a determination letter application. For example, correction of a failure to make required matching contributions under SCP simply requires making a corrective contribution to each affected participant equal to the missed matching contribution plus earnings. Correction under VCP requires making the same corrective contribution and paying an application fee of between $750 and $10,000 (based upon the number of participants). Under Audit CAP, the employer must make the same corrective contribution and then negotiate with the IRS to determine a sanction based on the “maximum payment amount,” which is the sum of the taxes due from the plan trust, employer and participants for all open tax years if the plan were to be disqualified. (The sanction amount will always be greater than the VCP fee.)

Other guidance available on the IRS website includes “A Guide to Common Qualified Plan Requirements,” which lists errors common to retirement plans generally, “Fixing Common Plan Mistakes,” which contains links to explanations of the approved correction methods for a number of common errors that are generally more detailed and technical than the explanations in the 401(k) Plan Fix-It Guide, and “Correcting Plan Errors,” which links to general information about the correction process, including links to VCP application forms.

Preventing Errors

Obviously, the IRS would prefer that employers avoid errors in the first place. The best way to prevent errors is to adopt written policies and procedures regarding plan administration and then perform audits to confirm that the policies and procedures are being followed. Additionally, employers must follow established policies and procedures to be eligible to correct errors under SCP.

The IRS website contains resources that are useful in developing plan policies and procedures. The “Policies, Procedures and Internal Controls Self-Audit” page contains a list of questions that employers may use to develop a plan’s policies, procedures and internal controls, including:

  • Who determines when an employee is eligible to participate in the plan?
  • What is your plan’s definition of compensation?
  • How are matching and nonelective contribution amounts determined?
  • How are requests for hardship distributions reviewed and approved?
  • Who makes sure that the plan document is updated timely?

The “Internal Controls Protect Your Retirement Plan” page lists examples of good “internal control procedures,” such as comparing salary deferral elections with the amounts deducted from wages, verifying that allocations and deferrals were determined using the correct definition of compensation and verifying that eligibility and vesting determinations were made using correct years of service totals. The materials are a good starting point for employers to create written policies and procedures for administering their 401(k) plans.

Next Steps

The volume of guidance on identifying, correcting and preventing 401(k) plan errors indicates that the IRS both recognizes that 401(k) plan errors are quite common and expects employers to take steps to identify errors and promptly correct them. Given the disparity between the penalties associated with voluntary correction under SCP or VCP and correction under Audit CAP, employers should seek to find and properly correct errors before the IRS discovers them.

King & Spalding recommends that employers take the following steps with respect to their 401(k) plans:

  • Identify current plan documents, administrative policies and procedures and internal control procedures.
  • Confirm that the administrative policies and procedures and internal control procedures have been updated to reflect plan amendments and current payroll practices.
  • If there are no written administrative policies and procedures, promptly develop them along with internal control procedures to monitor compliance.
  • Periodically perform a compliance audit to confirm that the plan is being administered in accordance with the plan document and administrative policies and procedures.

Authors, Eleanor Banister, Atlanta, +1 404 572 4930, ebanister@kslaw.com and Emily Meyer, New York, +1 212 556 2312, emeyer@kslaw.com.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.