By Brandon P. Long
Everyone makes mistakes. If you're responsible for administering your employer's 401(k) plan, I suspect you are smart and detail-oriented. I also suspect you hate to make mistakes, you lose sleep about them when they happen, and you hate the idea of costing your company money. But mistakes happen to everyone at some point. The good news is you can fix them. There is almost nothing that cannot be fixed.
Everyone makes mistakes. Here are some of the most common ones:
- You allow someone to enter the 401(k) plan before he has satisfied the plan's eligibility requirements.
- You fail to notify an employee that he was eligible to join the plan. A year has gone by, and he has lost out on a year's worth of opportunity to defer earnings into the 401(k) plan and receive company matching contributions.
- An employee elected to defer 10 percent of his pay into the 401(k) plan, but you deferred only five percent of his pay. Six months pass before you discover the error.
- You discover that your plan's definition of "compensation" includes bonuses, but you haven't been including bonuses for purposes of 401(k) deferrals.
- Your employer's third-party administrator incorrectly calculated vesting and gave each participant one extra year of vesting, allowing participants to borrow more than half of their vested account balance.
- The third-party administrator didn't deposit the employees' 401(k) deferrals until 10 days after paychecks were distributed.
If you've made one or more of these errors (or perhaps a different one), I promise you are not alone. Fortunately, both the IRS and the U.S. Department of Labor (DOL) have established programs that allow correction of these types of mistakes.
Under the IRS' self-correction program, just about anything can be fixed without notifying the agency. The IRS has identified common errors and correction methods. As long as you follow the approved correction method and document what you did, the fix is easy ― and you can correct the error on your own, without paying a fee to the IRS.
For more complicated errors, the IRS has established the Voluntary Correction Program (VCP), under which a plan sponsor can pay a relatively small filing fee, identify the error, and ask the IRS for permission to fix it. If you're really worried about a mistake, you may file a VCP submission on an anonymous basis. That way the IRS doesn't know who you are until you and the agency agree on the proper correction method.
The DOL's programs most often are used to correct late 401(k) deposits and late Form 5500s. Like the IRS, the DOL's programs are simple and relatively inexpensive. Also like the IRS, the DOL encourages employers to use its programs; they want mistakes to be fixed.
Perhaps the only thing you can do wrong when you discover an error is ignore it. Once you determine that an error has occurred, contact your benefits lawyer, figure out the proper and legal way to fix the error, and fix it. Do not allow an insignificant error that no one will fault you for to grow into something more complicated and more expensive.