Insights

As a plan sponsor and fiduciary, are you aware of the top pitfalls that are most frequently found by the DOL either through audits they perform or through the correction programs they offer? This list is certainly not all-inclusive, but does provide a good summary of some of the larger issues that are found most often and should be considered and monitored in order to keep them from happening to you and your plan.

1. Failure to timely amend the plan for tax law changes – As the law changes or as you make changes to your plan, the plan document should be amended in order to document those changes and ensure your document is up to date.

2. Not following the plan’s definition of compensation – When calculating an employee’s deferral or match, employers should pay close attention to the definition of compensation. Items such as bonuses, vacation pay, etc. need to be appropriately included or excluded from the calculation and can vary significantly from plan to plan.

3. Excluding eligible employees or including ineligible employees – Plan sponsors should have a good procedure in place to ensure that all employees are given the opportunity to enroll in the plan as soon as they are eligible. They should also consider doing spot checks throughout the year to verify that the procedure in place is working effectively.

4. Improper disbursements of funds – This issue can arise in many different areas of withdrawals, including hardship withdrawals and plan loans.

a. Plan loans – In the case of plan loans, the plan sponsor needs to be certain that the loan is made in accordance with the plan document, as well as ERISA rules. There are limits on the amount of the loan, the repayment time and when a loan can and should be considered in default and/or treated as a distribution. If you have a loan provision in your plan document, you should pay close attention each time a loan is made and be sure to ask your auditor or other advisors if you have any question as to how the transaction should be treated.

b. Hardship withdrawals – Again, there are certain ERISA rules that govern the procedures that must be followed in order for a participant to take a hardship withdrawal. There are only certain situations that allow for this type of distribution. In addition, once a participant takes a hardship withdrawal; he or she is prohibited from making any deferrals during the following 6 months.

5. Failing to remit employee deferrals in a timely manner – Employers are required to submit the employees’ deferrals as soon as the funds can be segregated. In most cases, employers can segregate and remit taxes within a couple days. Therefore, the DOL would expect the same in regards to 401k deferrals.

If you do unfortunately come across an issue, the DOL has different correction programs available. These programs include:

1. Self-Correction – The plan sponsor will correct the issue on its own without obtaining any approval or guarantee from the IRS. This program is used for operational failures that are insignificant or have occurred recently.

2. Voluntary Correction Program – The plan sponsor will correct the issue voluntarily by contacting the IRS and obtaining approval from the IRS.

3. Audit Closing Agreement – The plan sponsor is forced to correct the problem as a result of an IRS exam.

Keep these pitfalls in mind as you monitor your plan throughout the year. If you are in a position where you need to submit a correction, be sure to contact your tax advisor or the plan’s legal counsel to make sure that you are handling the correction in the proper and most beneficial manner.


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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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