401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #2: Plan Operations Did Not Follow Plan Terms 

One of the most common and often overlooked mistakes in administering a 401(k) plan is failing to operate the plan in accordance with its written terms. This includes any deviation from the plan document when administering eligibility, contributions, distributions, vesting, or loan provisions — even if the actions taken are otherwise compliant with general IRS rules.

Examples of Operational Failures

• Allowing an employee to defer before they met the plan’s stated eligibility requirements.
• Using an incorrect definition of compensation to calculate deferrals or employer contributions.
• Failing to apply the plan’s vesting schedule correctly.
• Allowing in-service withdrawals or loans in a manner not permitted by the plan document.
• Delaying the entry date for an otherwise eligible employee.
• Failing to follow the plan’s allocation formula for matching or profit sharing.

Correction Methods

Many operational failures can be corrected under the IRS Self-Correction Program (SCP) if:

• The error is deemed insignificant, or
• If significant, it is corrected within three years from the year in which the failure occurred (per Rev. Proc. 2021-30)

If a failure is outside the scope of SCP — for example, if it’s too old or involves a noncompliant amendment — it may be corrected by filing under the Voluntary Correction Program (VCP) through the IRS.

Goal of correction: Place affected participants in the same position they would have been in had the error not occurred.

Preventing This Error

• Review your plan document provisions annually, especially after restatements or interim amendments.
• Train HR and payroll staff thoroughly on the plan’s operational requirements.
• Coordinate regularly with your recordkeeper or TPA to ensure their systems match the plan terms.
• When changing systems or providers, perform data audits and reconciliations to ensure the transition reflects accurate eligibility, deferral, and compensation records.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.