Top 5 401(k) Plan Violations Caught by Auditors

Top 5 401(k) Plan Violations Caught by Auditors

Small mistakes could mean big trouble for plan sponsors who aren’t paying attention

Hefty receipts from private jet rentals to the Cayman Islands for an individual who’s reported no income in each of the past five years might pique the interest of certain interested parties, the government being one.

If only that was all it took to trigger an audit. Unfortunately, infractions that are far less egregious often result in a knock on the door from an unwelcome guest. In our hyper-regulated and increasingly-litigious environment, even the best-intentioned and most organized plan sponsors can inadvertently get tripped up.

So how do you receive the coveted “no-action” letter? Avoid these common mistakes plan sponsors make that get the attention of the DOL, IRS and anyone else with the authority to come looking:

1. Form 5500 filing errors. No real surprise here, so why do they happen so often? Common 5500 errors include failing to follow electronic filing guidance and failing to answer multiple part questions—simple, small mistakes that could result in big trouble. Pay attention to detail. Make sure that what you disclose on your Form 5500 matches your 408(b)(2) disclosures. A TPA or related service provider that preps the 5500 document for the plan sponsor to provide them a signature ready form are available and invaluable. 

2. Late or erratic payment of employee deferrals. “According to the DOL, contributions must be paid as soon as administratively feasible, but no later than the 15th business day of the following month (when deferrals are withheld),” according to Heidi L. LaMarca, who is a principal and leads the employee benefit plans practice at the Atlanta-based CPA firm of Windham Brannon. “Employee contributions should be within this time frame, but also consistently remitted among all payrolls and pay periods.”[1] 

Again, a service provider that offers payroll integration (true payroll integration) virtually eliminates this risk – since the process is entirely automated.

3. Ignoring employees. Sounds silly, but it happens far more often than it should when dealing with plan participation issues. Sponsors too often procrastinate in changing deferral amounts or allocations, code them incorrectly or get the calculation wrong altogether[2]. 

“401(k) contributions should be determined in accordance with the plan document (which should include the definition of compensation) and in accordance with employees’ instructions,” according to retirement expert Paula Aven Gladych. Failing to do so could trigger a complaint directly to auditors or raise red flags during the audit process.

A service provider that offers an online portal where the employees make changes themselves helps empower participants to further engage in the retirement planning process. The portal automatically synchs with payroll and the retirement system, whether or not it’s the employer or employee who makes the change.

4. Excessive fees. You’d be surprised (or maybe you wouldn’t) at what auditors consider “excessive.” Make sure your 408(b)(2) documents not only matches the Form 5500, but that they’re up-to-date. Recent lawsuits have made their way to the Supreme Court, placing fees high on the list of investigator priorities. Every fee and compensation arrangement should be thoroughly documented and justified. Take a look at plans of a similar size, scope and nature to ensure you’re not high. If you are, find out why and adjust if necessary. If you’re using a TPA or record-keeper, their fees and expenses should be absolutely transparent. If they’re not, it’s time to look elsewhere for services.

5. Top heaviness. The Society for Human Resource Management rightly notes that a 401(k) plan is considered top-heavy “when it provides more than 60 percent of the present value of benefits to key employees. If a plan is top-heavy, it must satisfy certain accelerated vesting requirements and provide certain minimum contributions to all eligible non-key employees.”[3]

The organization adds that the most common errors that occur are failure to test for top-heaviness, improper exclusion of eligible employees from the plan, and allocation errors.

The risk of top heaviness can be avoided with a plan design based on knowledge of the plan sponsor’s business. A good service provider works with the plan sponsor to uncover these risks and then builds a plan to avoid them.


[1] “Top 10 401(k) compliance mistakes auditors catch.” Benefitspro.com. Nov. 10, 2014.

[2] “12 best ways to avoid a DOL audit.” Benfitspro.com. Oct. 24, 2012.

[3] IRS: Common Errors in Small and Top-Heavy 401(k) Plans. SHRM.org. Mar. 10, 2010.

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