Give Your Section 401(k) Plan a Compliance Check

Originally published
Originally published: 5/1/2012

10-point checklist will tell if you might need adjustments.

The Internal Revenue Service recently issued an interim report produced by its Employee Plans Compliance Unit (EPCU), reporting on its Section 401(k) compliance check project. Section 401(k) plans are the largest part of the private retirement plan system, comprising 60% of all plans. These plans, unfortunately, also suffer from the greatest number of compliance problems, owing primarily to the complexity of the law and ever-changing regulations.

In the interim report, EPCU identified the most frequently identified problems on audit of Section 401(k) plans. Among the most frequent problems were failure to adopt amendments in a timely way, failure to follow the plan terms, failure to follow the plan's eligibility requirements, using an incorrect definition of "compensation," and failing to make required minimum distributions after a participant attains age 70½.

As a result of this project, the Internal Revenue Service is placing a strong emphasis on encouraging employers to adopt internal controls and perform internal audits.  Operational mistakes with retirement plans are inevitable, given the high volume of "events" that occur during a particular year: deferrals being made, distributions being made, employees become ineligible, employees terminate employment, etc. By conducting an internal audit, most employers could quickly identify where problems exist.

The Internal Revenue Service has published a 401(k) Plan Fix-It Guide to help employers identify problems and provide advice regarding correction. This Guide can be found on the IRS website at  While some parts of the Fix-It Guide are helpful, other parts would have meaning only to a pension professional. You can give your plan a quick checkup by answering the following statements with a "yes" or "no."

  1. You received a brand-new profit-sharing plan document (sometimes referred to as a restatement) between April 1, 2008 and April 30, 2010.
  2. Someone in your office is responsible for determining when an employee becomes eligible to contribute to the plan.
  3. Your new employees (or newly eligible employees) are given a summary plan description and an explanation of how to contribute funds from their paycheck into the plan.
  4. Contributions to your Section 401(k) plan by employees are deposited within two or three days of the date the money is withheld from their paychecks.
  5. Employee contributions from their paychecks were limited to $16,500 for the 2010 and 2011 calendar years. (The limit for 2012 is $17,000.) For employees aged 50 and older, total contributions from their paychecks were limited to $22,000 for the 2010 and 2011 calendar years.
  6. If your plan permits participant loans, all loans are being repaid in equal installments (either monthly or quarterly) over a term of no longer than 60 months.
  7. The interest rate on participant loans is always at least equal to the prime rate plus 1% at the time the loan is made.
  8. If your employees can choose how their money is invested, you provide them with quarterly statements of their account balances.
  9. If your employees cannot choose how their money is invested, you provide them with an annual statement of their account balances.
  10. All employees age 70½ or older have received or are receiving distributions of their profit sharing account on a regular basis.

If you answered "no" to any of the statements, your Section 401(k) plan may be out of compliance. In such case, you should check with your accountant or plan administrator to be sure that there are no problems. Most of the potential problems described above can be "self-corrected" under Internal Revenue Service rules. Those problems that cannot be self-corrected can be corrected under a voluntary compliance program at relatively low cost.

Michael P. Coyne is a founding partner of the law firm Waldheger Coyne, located in Cleveland, OH. For more information of the firm, visit: or call 440.835.0600.

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