There’s no need to panic if you or one of your staffers discover they’ve made mistakes with your company’s 401(k) plan. No one is going to jail, and in almost every case you won’t be paying a penalty, so long as you take steps to rectify the error promptly and correctly.
The IRS’ Employee Plans Compliance Resolution System (EPCRS) allows employers to correct many of the most common retirement plan mistakes, notably those with enrolling new employees. For an overview of how the EPCRS works and what you’ll need to do, click here.
Have your financial staffers test their knowledge of 401(k) corrections by answering the following statements TRUE or FALSE. Then check the answers further down.
1. Two of the most common errors – not giving an eligible employee the opportunity to make elective contributions, and not executing an employee’s salary deferral election – can be fixed by making a 50% contribution of the missed deferral to the employee’s account.
2. In both of these situations, you should adjust the contributions for earnings.
3. The employee would be fully vested in corrective contributions your company makes.
4. Employees must use the automatic enrollment deferral amount or a higher amount.
ANSWERS TO THE QUIZ
1. TRUE. However: The amount of the missed deferral in both of these scenarios is calculated differently. In the first situation, the deferral is based on the average of the deferral percentages for all of your employees in the same category. For the second situation, it’s based on the percentage the employee set as his or her elected percentage.
2. TRUE. Base the contributions starting from the date the deferral should have started through the date you correct the mistake.
3. TRUE. The employee is still vested. But restrictions on withdrawals from the plan would still apply.
4. FALSE. You can allow the employee to reduce the default percentage to zero, if he or she chooses to.