401(k) plans are highly regulated to protect the employees who use them. This thorough regulation also means the design, documentation and administration of the plans are rife with opportunity for mistakes. Some of these mistakes, depending upon who finds or reports them, are punishable with serious penalties.
Here's a list to help in your compliance:
1. Not updating your plan document to reflect all applicable law changes. Federal tax law governing 401(k) plans change often. As the employer, you must be able to demonstrate that you have a written plan document and any necessary amendments to reflect all relevant tax law changes. You can get more information regarding 401(k) plans via www.cxcsolutions.com/compliance/401k.
2. The plan implementation is not following the plan document. After ensuring you have not made mistake #1, it is still the employer's responsibility to make sure that all employees, vendors and tax professionals who service the plan follow the plan's current terms.
3. Not using the plan's definition of compensation correctly for all deferrals and allocations. This is complicated by the fact that plans often use different definitions of "compensation" for different plan purposes.
4. Failing the 401(k) ADP and ACP nondiscrimination tests. The amount of contributions made by and for NHCEs (non-highly compensated employees) must be proportional to contributions made for HCEs (highly compensated employees) such as owners and managers. This must be checked annually with the ADP and ACP nondiscrimination tests. To find mistakes, the IRS recommends an independent review to determine if you properly classified HCEs and NHCEs and accurately calculated the ADP and ACP nondiscrimination tests.