According to past Internal Revenue Service forums, some of the most common errors in plan operation include the following:

Late deposits of employee deferrals and loan repayments, which is also a prohibited transaction that may be corrected through the DOL's Voluntary Fiduciary Correction Program. For a "small" plan (generally, a plan with less than 100 participants as of the first day of the plan year), the requirement is to deposit the withheld amounts within 7 business days of withholding. For a "large" plan (generally, a plan with 100+ participants as of the first day of the plan year), the deposit requirement is more complicated. Essentially, the requirement is to deposit as soon as reasonably feasible, but no later than the 15^th business day of the month following the month withheld. Under audit, the DOL reviews the employer's/plan's entire deposit history, and generally uses the quickest deposit time-period the employer made as the employer's deposit standard. For example: If the employer usually deposits within 10 business day of withholding, but on at least one occasion made a deposit within 6 business days, it is highly likely that the DOL will determine the employer's requirement for making all deposits should have been within 6 business days. Under these circumstances, the DOL will generally require the employer to make-up lost earnings, based upon a deposit standard of 6 business days, for all deposits make later than within 6 business days. This is why it is critical for a plan to know its deposit standard, and to review (perhaps more than annually), its deposit procedures and actual dates of deposit.
Failure to follow the terms of the plan, such as not using the correct definition of compensation for purposes of deferrals or allocations of employer contributions, or allowing employees early/late into the plan. Failures can be corrected using one of the IRS' correction programs (currently described in Revenue Procedure 2008-50). Some of the corrections require a filing with the IRS (along with a filing fee). Where employees were allowed late into a 401(k) plan, the correction generally requires the employer to make-up lost deferrals and any employer contributions, plus any earnings. The longer the period from the error to the date of discovery and correction, the more costly to the employer. To help minimize costs of correction, an annual (or more frequent) review of the plan's provisions and its operation is advisable.
Failure to suspend deferrals for six months in a 401(k) plan when a participant takes a hardship withdrawal. The correction is generally to refund the employee any deferrals made during the required suspension period and forfeit any matching contributions on such, which can frustrate the employee. In addition, should the value of the deferrals at the time of the refund be less than the amount contributed, the employer might have to make-up the difference.
Failure to satisfy non-discrimination tests, such as the ADP test. A failed ADP test must be corrected within 12 months of the failure, or otherwise the plan risks disqualification. Generally, the correction of a failed test is made by (i) refunding excess contributions (plus earnings) to one or more highly compensated employees, (ii) funding an employer contribution that is 100 percent vested immediately to non-highly compensated employees, or (iii) a combination of (i) and (ii). Where any refunds are made after 2 ½ months following the plan year of the failure (or after 6 months if the plan has an EACA, described earlier), a 50 percent excise tax on the employer is triggered. Where the employer funds a contribution, the amount can be costly. If refunds are made, the affected highly compensated employees are usually less-than-ecstatic, since the refunds represent additional taxable income. Although the employer might not be able to avoid many of the costs to correct a failed ADP test, the employer can avoid any possible plan disqualification. Now that would be costly.

Next: Additional issues to review during the Annual Check-up

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