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4 Common Pitfalls for 401(k) Plan Sponsors

4 Common Pitfalls for 401(k) Plan Sponsors

July 06, 2022

Your many roles as a 401(k) plan sponsor rest squarely on the foundation of fiduciary responsibility. And while you and your team have the best intentions, pitfalls can be around every corner. Below are four of the most common. 


Failure to properly implement employee deferral elections 

Some companies miss or make incorrect employee deferral elections. In either case, corrections will be required, which can include funding a portion of what the employee should have contributed - as well as the employer match and lost earnings on the contributions. 

To curb these mistakes, build in active monitoring and checking of all deferral elections to ensure every requested change is timely and accurate.


Late remittance of plan contributions 

401(k) sponsors are required remit employee contributions within an “administratively feasible” timeframe. Although regulators set overarching maximum time periods,“administratively feasible” timeframes are set by each company.  

Start by creating a remittance policy that defines your administratively feasible time frame, then clearly state the maximum number of days to fund contributions, and, finally, name a backup team member to remit payments. Note: if you make late remittances, corrections may be required. 


Excess plan contributions 

Annually, the IRS establishes maximum 401(k) contributions for employees. Along with individual maximums, plans may be subject to annual nondiscrimination tests that ensure highly-compensated employees do not disproportionately benefit. Note: certain tests may be avoided by adopting a safe harbor plan. 

Although your payroll system may have parameters to limit contributions, monitor your systems to avoid errors. If your plan fails the nondiscrimination tests, you may need to refund a portion of contributions to highly-compensated employees.


Eligible compensation 

Finally, one of the most common 401(k) errors is the misapplication of the plan’s definition of eligible compensation. The definition can vary from plan to plan and a small clerical error in the payroll system can cause years of noncompliance and costly corrections.

As always, continue to monitor the plan to correctly apply the plan's definition of eligible compensation.

To review your 401(k) plan with an advisor, contact us today.