Benefits and Compensation

Benefits 101: Common 401(k) Mistakes

A common benefit that many employers now offer to employees is a 401(k) plan to assist them in saving for retirement. This type of benefit is typically highly valued by employees, and of course, employers want to take steps to ensure it’s administered properly—both legally and in terms of not making mistakes that impact employees.401(k)

Some 401(k) administration mistakes could even result in penalties or jeopardize the ability to continue the plan, while others may simply frustrate employees.

Examples of Mistakes or Actions that May Frustrate Employees or Create Legal Problems

Here are a few examples of common 401(k) administration mistakes:

Late, incorrect, or inconsistent timeliness of contributions. There are clear legal guidelines on how much time an employer has to make a 401(k) contribution after it has been withheld from an employee’s pay. Failing to meet these deadlines can result in disqualification from the plan or monetary penalties. If deposits are made late, the employer may also be responsible for paying the employee the lost investment earnings that resulted from the late deposit.

Another problem within this realm is being inconsistent with the timeliness of the contributions. Besides the legal component above, there are also employee expectations. Even if the employer is meeting its legal requirements, employees may be frustrated if the contributions are added to the account at inconsistent timelines after the money has been deducted. Be sure to explain when the contribution will be made, and then stick with it.

Not following your own guidelines. Each 401(k) has its own specifics. While there are, of course, legal aspects that must be met in plan administration, there are differences that are up to each plan sponsor, such as what level of contributions the employer will match, whether employees will opt in or opt out of plan enrollment, what types of compensation are included in the calculations, whether hardship withdrawals will be allowed (and under what circumstances), etc.

The key is to ensure that the setup and administration of the plan follow the plan guidelines. Failing to do so could result in penalties.

Failing to properly identify and/or inform eligible employees. Not only will employees be frustrated if they missed out on an opportunity to start their 401(k), but if this is systemic, it could also appear to be discriminatory. The plan administrator needs to take action to ensure all eligible employees are made aware of their opportunity to participate.

Failing to update the plan to reflect any legal changes. Legal requirements may change over time; anyone who is responsible for administering the organization’s 401(k) will need to remain updated on legal changes, make policy changes, and communicate them in a timely manner.

This list is not comprehensive, but it is intended to reflect common problems. When any issue is uncovered, employers will want to first remedy the problem and then take steps to ensure it does not happen again in the future.

Many of these issues could be caught by conducting an annual review or internal audit of plan documents and procedures. If this isn’t part of your administration, it’s something to consider.

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