Below are some examples of operational 401(k) errors. If a 401(k) plan sponsor is aware of an operational error, the plan sponsor should work with their 401(k) TPA or 401(k) provider to resolve the situation. In many cases, it is also necessary to engage an ERISA attorney.
XYZ Company’s 401(k) plan document says that Division A employees shall be excluded from the 401(k) Plan. XYZ Company allows ten Division A employees to participate in the 401(k) plan because they are management employees.
• XYZ will have to amend their plan to retroactively include these employees. Such an amendment would need to be nondiscriminatory.
• In the alternative, the XYZ Company 401(k) plan can forfeit the account balances for the Division A Employees.
A participant in the ACME 401(k) plan has total contributions to the Acme 401(k) plan in the amount of $59,000 for 2010. The Section 415 annual additions limit is $49,000. His elective deferrals were $16,500, the employer match was $8,000, and the employer profit sharing contribution was $34,500. The excess amount is $10,000. The participant is under the age of 50.
• The plan document says that all allocations must be limited to the IRC 415 limit.
• The plan document says that profit sharing contributions are reduced first. The excess amount will need to be forfeited along with any investment earnings or losses. The excess amount does not revert back to the employer, but rather is transferred to the forfeiture account.
The XYZ Plan has a three year cliff vesting schedule. A participant who is 0% vested is paid as if he is 100% vested resulting in an overpayment from the XYZ Plan of $2,500.
• The plan must make efforts to have the $2,500 restored to the plan. If the participant will not return the money, the employer needs to make the plan whole by contributing the amount to the plan resulting in a windfall to the participant.
• The plan must notify the participant that the $2,500 is not eligible for rollover.