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By Joni Dement, QKA, QPA, HKFS Senior Compliance Advisor

Keeping your 401(k) plan in compliance each year is essential to avoiding a costly correction down the road or possibly disqualifying plan assets. Some of the most common items IRS examiners find when reviewing a retirement plan normally fall into one of the below categories:

Acquisitions: Companies acquire another business and do not properly include the new employees in the plan. Depending upon the type of acquisition, prior service may be required to be credited which could result in employees being eligible in the plan as of the date of the merger. In addition, providing the correct employer contributions during the year of the acquisition is also an area of concern. Discussing these items with a compliance advisor prior to closing the sale helps to make sure you are provided with all of the available options to adhere to the complex regulations concerning these types of transactions.

Changes in Employee Workforce: Another area to which examiners pay close attention is when fluctuations in the number of plan participants occur. This can occur during the course of the year or when comparing multiple years’ 5500 participant counts. Each year, your participant counts should be monitored for the termination of a group of employees or a significant percentage drop in your workforce. These situations could mean your plan has a partial plan termination. A partial plan termination requires 100% vesting of the affected participation. Some plan providers will monitor this activity for you and alert you when a potential change in employee numbers may warrant a partial plan termination. Plan sponsors should verify with their service provider if this is part of their service and if not, put in place procedures to monitor this activity.

Compliance Testing: Each year your plan is required to perform certain tests to ensure it is operating in a nondiscriminatory way. Incorrectly performing these tests or failing to perform them is another common issue for plans. Selecting a plan provider who is experienced in these complex tests and has a system in place to monitor and ensure tests are completed is crucial to avoiding compliance failures.

Plan Documents: Plans documents are subject to a filing cycle. For pre-approved plans, this cycle requires that every six years your plan document is updated. In addition, as new regulations are issued or plan design changes are made, plan amendments are required to be signed. Many times, during an audit it is discovered that these amendments were not drafted or were not signed in a timely manner. Ensuring your document provider has in place a system to monitor legislative updates to plan documents and verifying that your plan document has been updated each year for any regulatory amendments will help avoid fines for late amendments.

Distributions and Vesting: Employees should be paid their vested account balance based upon the vesting procedures within the plan document. Incorrectly tracking years of service or failing to increase vesting for a participant reaching retirement age, becoming disabled, or due to death, are frequent mistakes found during a plan audit. To safeguard your plan from these types of errors it is important to review employee census data each year as well as have in place a process to inform your provider in the event of a death, disability or retirement for individuals in your workforce.

Payroll Issues: This area includes items such as participant deferrals being taken from their paycheck but not sent to the plan or a participant electing a deferral change and that change is not implemented. Incorporating checks and balances from your payroll system to your plan records will help shield your plan from inconsistencies in these areas.

Keeping your plan in compliance with retirement regulations can seem overwhelming, but partnering with a trusted advisor who assists in monitoring these items can help take the burden off your shoulders.

If you need help reviewing your plan, call HKFS Retirement Plan Services at 800-791-8994 or email at