Key insights
- Regular reviews of payroll, compensation definitions, eligibility, deferral elections, vesting, distributions, and testing results can help catch common plan errors early.
- Compare everyday plan administration with the plan document whenever pay codes, employee elections, or workforce circumstances change to spot inconsistencies before correction is required.
- Staying ahead of contribution limits, remittance deadlines, and annual testing can reduce costly corrections and last-minute administrative work for your team.
- Payroll providers, TPAs, and advisors can make plan oversight easier by supporting routine reviews, timely reminders, and practical automation across key processes.
Mitigate risk related to your employee benefit plans.
Keeping your 401(k) or 403(b) plan on track can help you avoid costly corrections, penalties, and extra administrative work. But a few common defined contribution plan mistakes can create bigger problems if they go unnoticed.
Discover where errors often happen and the practical steps plan management can take to help prevent them.
Common errors in defined contribution (DC) plans
Even well-managed defined contribution (DC) plans can encounter compliance and administrative challenges. The following are common errors along with their potential consequences:
| Common Error | Why It Matters |
|---|---|
| Incorrect definition of compensation |
Issue: Compensation used for plan calculations doesn’t align with the plan document. Risk: Corrections may be required, potentially resulting in delays and financial penalties. |
| Excess contributions |
Issue: Annual testing identifies disproportionate benefits for highly compensated employees. Risk: Additional employer contributions or other corrective actions may be required. |
| Late remittances |
Issue: Employee deferrals aren’t remitted promptly after payroll withholding. Risk: Penalties and corrective actions may be required. |
| Employee eligibility errors |
Issue: Eligible employees are improperly excluded from the plan, or ineligible employees are allowed to participate. Risk: Corrective contributions, administrative burden, and potential compliance issues may result. |
| Failure to follow employee deferral elections |
Issue: Employee deferrals are not withheld according to participants' elections, including incorrect percentages, dollar amounts, or missed changes. Risk: Corrective employer contributions and additional administrative effort may be required. |
| Vesting and distribution errors |
Issue: Vesting percentages are calculated incorrectly or plan distributions are processed contrary to plan provisions. Risk: Participants may receive incorrect benefit amounts, leading to corrections and potential compliance concerns. |
| Top-heavy testing issues |
Issue: The plan fails top-heavy testing or required top-heavy minimum contributions aren’t properly applied. Risk: Additional employer contributions and corrective actions may be required to maintain compliance. |
Stay informed with the latest employee benefit plan rules. Access our report for key updates.
How to help avoid errors in DC benefit plans
In addition to staying updated with the latest rules and regulations for employee benefit plans, plan sponsors can implement policies and procedures to mitigate the impacts of errors.
Perform periodic tests
Select a sample of employees and their paystubs to double check that employee deferrals and employer matching contributions were calculated correctly. It is especially important to review off-cycle payroll.
Review payroll setup
Work with your payroll provider periodically to review the setup of your individual pay codes to verify they’re correctly classified as eligible or ineligible for deferrals and matching calculations as determined by the plan document.
During this review, pay particular attention to bonuses as well as new and rarely used pay codes.
Make it part of onboarding
When onboarding new employees part-way through the year, request a payroll report from their previous job to verify the annual limits are properly followed.
As part of the SECURE Act, new plans must include auto-enrollment and auto-increase provisions.
Consider adopting safe harbor plan provisions
Safe harbor plans automatically pass the annual ACP and ADP tests. There are a few requirements to become a safe harbor plan, including one of the following employer contribution calculations:
- 100% match to 3% deferral, 50% match to 5% deferral (max 4% match)
- 100% match to 1% deferral, 50% match to 6% deferral (max 3.5% match)
- Nonelective match: 3% match to all employees
Work with your third-party administrator (TPA) to adopt safe harbor plan provisions.
Review compensation definitions
Review your definition of compensation with your advisor. Your advisor can help evaluate whether your definition can reduce the possibility of discrimination testing issues.
Identify backup personnel
Create a backup plan in case the person in charge of payroll is away (sick, vacation, etc.).
Create reminders
Set up reminders and calendar alerts to enable timely remittances to the TPA or custodian. Your TPA can help with these reminders.
Look for ways to automate processes
Automation can help reduce the administrative lift needed for timely remittances, including:
- Setting up automatic withdrawals from the bank account by the TPA or custodian
- Setting up automatic communication between the payroll system and the TPA or custodian
Verify employee eligibility
Regularly review employee hire dates, hours worked, and entry dates to confirm eligible employees are enrolled in the plan at the appropriate time. Pay special attention to part-time, seasonal, and rehired employees.
Audit employee deferral elections
Periodically compare employee election forms or system elections to actual payroll deductions to confirm deferrals are being withheld correctly. This review is particularly important after payroll system updates or employee election changes.
Not sure whether your plan needs an audit? Learn what triggers a 401(k) audit and what to expect.
Review vesting and distribution procedures
Establish a process for reviewing vesting calculations and distribution requests before they’re processed. Periodic reviews can help identify discrepancies before participant benefits are affected.
Monitor top-heavy status
Review ownership and key employee data throughout the year and discuss potential top-heavy implications with your TPA. Early identification can help plan for any required minimum contributions.
How CLA can help with defined benefit plans
Keeping your plan compliant while managing payroll changes, testing deadlines, and participant transactions can stretch an already busy team.
CLA’s employee benefit plan professionals can assist with plan audits, compliance reviews, operational assessments, and correction guidance. These services can help uncover gaps between plan documents and daily administration, evaluate controls, and address errors before they become more costly.
We can also work with your payroll provider, TPA, and other service providers to clarify responsibilities and support timely follow-through.