For financial institutions, 401(k) compliance isn’t just a regulatory requirement, but a fiduciary responsibility. A well-managed plan not only safeguards employee retirement savings but also reinforces institutional credibility, minimizing exposure to costly penalties, excise taxes, and reputational harm.
That was the central message of Richey May’s recent webinar, “401(k) Compliance Essentials,” featuring Katie Compton, Partner, Mortgage Banking, Richey May, alongside Michael Schmit, Senior Director, and Patrick Blanchard, Managing Director, Compensation & Benefits, Alvarez & Marsal. Together, they identified common pitfalls that threaten compliance and shared actionable steps to ensure accuracy, transparency, and peace of mind for both HR and finance leaders.
The Foundations of 401(k) Compliance
A 401(k) plan’s tax-advantaged status depends on meeting the strict qualification requirements set by the IRS and Department of Labor (DOL). These include operational consistency, timely contributions, accurate deferral calculations, and adherence to non-discrimination standards designed to ensure fairness across all employee groups.
Errors in these areas can have far-reaching consequences. If deferrals are miscalculated or deposited late, employees may have mismatched contributions or lose potential earnings. If plan operations deviate from written terms, the plan could face additional scrutiny during an IRS or DOL audit, which may result in more severe penalties and fees than if the errors were resolved through the available correction programs.
For these reasons, Richey May’s experts recommend annual internal reviews and periodic third-party audits to identify and address issues before they attract regulatory attention, in addition to the required audit of a plan’s financial statements.
Common Compliance Challenges and How to Correct Them
Even institutions with sophisticated payroll and benefits systems encounter recurring compliance issues. Among the most prevalent are:
- Missed or Incorrect Deferrals: Payroll errors (especially those that occur after employee deferral changes) can result in missed or understated contributions. Regular reconciliation between payroll data and plan records helps catch discrepancies early.
- Employer Contribution Failures: Incorrectly applying the company match (for instance, excluding bonuses or overtime) can result in underfunded employee accounts. Employers must make up these shortfalls, including lost earnings.
- Late Deposits: The DOL requires that employee deferrals be remitted as soon as administratively feasible, generally within a few business days and never later than the 15th business day of the following month. Delays trigger excise taxes and reporting obligations on Form 5500.
- Plan Operation Errors: Failing to follow plan terms, such as eligibility timing or compensation definitions, undermines compliance and could lead to disqualification if uncorrected.
When errors occur, the IRS’s Employee Plans Compliance Resolution System (EPCRS) and the Voluntary Correction Program (VCP) allow plan sponsors to self-correct or voluntarily disclose issues. Using these programs proactively can preserve the plan’s qualified status and mitigate penalties.
The Importance of Timely Contributions and Robust Controls
Of all 401(k) compliance requirements, timely deposits are among the most visible—and most scrutinized—by regulators. Common causes of late contributions include staff turnover, vacations, or payroll system conversions. The solution lies in well-documented internal controls that define deposit procedures and backup responsibilities, ensuring continuity when personnel or systems change.
In Richey May’s experience, institutions that implement automated tools and system alerts to track contribution timing dramatically reduce the risk of prohibited transactions. Establishing accountability across HR, payroll, and finance functions further ensures that each deposit is handled promptly and accurately.
Documentation, Transparency, and Continuous Oversight
Maintaining compliance is about proving that controls are in place to prevent errors rather than fixing them after the fact. Regulators look for consistent documentation of processes, corrections, and reconciliations. Institutions should maintain records of:
- Deferral elections and change confirmations.
- Deposit timing reports and reconciliation logs.
- Correction calculations and evidence of lost earnings remediation.
Proactive transparency also builds trust with plan participants, auditors, and regulators alike. It demonstrates that the institution’s fiduciary duties are being met with diligence and care.
Building a Culture of Compliance and Confidence
Ultimately, 401(k) compliance is about more than avoiding penalties; it’s about reinforcing organizational integrity and protecting employees’ long-term financial well-being. As the Richey May and Alvarez & Marsal team emphasized, strong internal controls, regular reviews, and prompt corrections form the backbone of any compliant plan.
By treating 401(k) compliance as an ongoing process rather than an annual checklist, institutions can ensure stability, fulfill their fiduciary responsibilities, and foster lasting confidence among employees and stakeholders.
