It is not uncommon for employers with 401(k) plans to discover that a plan failure has occurred. For instance, the American Society of Pension Professionals and Actuaries (ASPAA) recently studied over 3,000 plans and found that nearly half of them failed the top-heavy test. Whether via audit or some other review process, it can be unnerving to learn that a failure has occurred and to determine how to correct it; however, employers should understand that plan failures do happen and that they are resolvable—and potentially without fees or penalties under the right circumstances.

Top 11 mistakes of 401(k) plan sponsors

Here are the top mistakes from the IRS' "401(k) Plan Fix-it Guide":

1. Lack of updates to the plan document to reflect recent changes in the law.
2. Failure to base plan operations on the plan document.
3. Improperly defining compensation for deferrals and allocations.
4. Employer matching contributions were not made to all appropriate employees.
5. Failure of 401(k) ADP and ACP nondiscrimination tests.
6. Failure to provide eligible employees the opportunity to make elective deferral.
7. Elective deferrals were not limited to the amounts under IRC Section 402(g) and excess deferrals were not distributed.
8. Failure to timely deposit employee elected deferrals.
9. Participant loans fail to conform to the requirements of the plan document and IRC Section 72(p).
10. Hardship distributions were not made properly.
11. Required contributions were not made to the plan.

The Internal Revenue Service (IRS) has adopted the Employee Plans Compliance Resolution System (EPCRS) to address such failures and the required corrective action(s). The EPCRS allows plan sponsors to correct plan defects and to protect the qualified status of such plans; however, some have found the EPCRS to be difficult to navigate. The information below is intended to assist employers determine how to correct plan failures using the EPCRS.