Mistakes in Matching Contributions

Erroneous or missed matching contributions are among the most common mistakes in 401(k) plans. These errors can occur due to several factors, including:

• Failure to follow the plan document’s terms regarding matching contributions
• Improper calculation of hours of service
• Incorrect identification of employee plan entry dates
• Using the wrong definition of compensation
• Incorrect timing of matching contributions compared to the plan document

Finding the Failure

To determine if this mistake has occurred, and to prevent future errors, start by reviewing the terms of the plan document and compare them with the plan’s actual operations. Ensure the definition of compensation used to calculate matching contributions aligns with the plan document.

Correction Methods

If missed or incorrect matching contributions are identified, corrections should be based on the plan document terms. The goal is to place the affected participant in the position they would have been in had the error not occurred. This typically involves making corrective contributions to the affected participant’s account.

Corrections can be made through the IRS Employee Plans Compliance Resolution System (EPCRS):

• EPCRS Self-Correction Program (SCP): The IRS Self-Correction Program (SCP) allows plan sponsors to correct certain operational failures without IRS approval, provided the plan has established compliance practices in place.
  • If the failure is significant, it may still be corrected under SCP if the correction is completed within three years of the end of the plan year in which the error occurred (per Rev. Proc. 2021-30).
  • If the failure is insignificant, it may be corrected at any time under SCP, even beyond the three-year window. The significance of a failure is based on all relevant facts and circumstances.
• Voluntary Correction Program (VCP): If a significant failure is not corrected within the SCP time limit, or if the error involves a failure not eligible for SCP, the error must be corrected using VCP. This requires a formal submission and IRS approval.
• Fees: There is no fee to correct under SCP. VCP submissions require a fee based on plan size and issue complexity. The current VCP fee schedule is outlined in Rev. Proc. 2022-4 and subsequent updates. See the IRS EPCRS VCP Guidelines.

Error Prevention

To prevent errors in employer matching contributions:

• Ensure all relevant internal staff and external service providers are familiar with the plan document and its matching provisions.
• Notify all service providers of any plan document updates.
• Verify that all necessary employment and payroll information is provided to properly calculate matching contributions.
• Periodic internal audits and automated match tracking tools can help confirm that the correct contributions are made at the right time.