Quick Summary: Failures in ERISA and tax qualification compliance for 401(k) plans often begin as ordinary administrative errors: an unexecuted amendment, a contribution deposited later than the plan’s normal schedule, or an eligible employee left out. This guide explains seven common ERISA and Internal Revenue Code compliance problems, the agencies that oversee them, and the correction paths that may be available.
Key Takeaways
- Plan operations must follow the governing document: an unsigned amendment or an eligibility practice that conflicts with written terms can create a qualification failure.
- Deposit timing is not a 15-day rule: the standard is the earliest date you can reasonably separate the money from company assets.
- Fiduciary status follows function: if you exercise discretionary authority over the plan, you may be a fiduciary regardless of your title, and a breach can create personal liability.
- Hiring a provider does not end sponsor oversight: the responsible fiduciaries still need to select and monitor the provider through a prudent process.
- Voluntary late Form 5500 filing can substantially reduce penalties: for an eligible delinquent small-plan filing, the Department of Labor’s voluntary filing program for late Form 5500 filings generally caps the penalty at $750 per filing, while ordinary DOL penalties can accrue daily at a much higher rate.
- Early action preserves correction options: most administrative failures can be corrected, and acting before an IRS or DOL examination generally preserves more correction options.
No single provider is automatically responsible for every part of a 401(k) plan. Payroll may transmit employee deferrals, the recordkeeper tracks participant accounts, and a third-party administrator handles annual testing. A problem can go unnoticed when nobody reconciles that work with the signed plan document, contribution records, loan schedules, and Form 5500 filings.
In fiscal year 2025, the Department of Labor’s Employee Benefits Security Administration closed 878 civil investigations. Of those, 556, roughly 63%, resulted in monetary recoveries or other corrective action. These were targeted enforcement cases, not a random sample, so 63% is not an industry-wide violation rate.
The relevant point is that EBSA frequently required money to be restored or another problem to be corrected in the cases it investigated.
For an employer, ERISA compliance and 401k oversight means knowing who checks each provider’s work. A provider may have its own contractual or fiduciary responsibilities, but the plan sponsor still needs a prudent process for selecting and monitoring it.
The employer should know who verifies eligibility, contribution deposits, loan repayments, annual testing, and Form 5500 filings, the same pressure points covered below.
What ERISA and Tax-Qualification Compliance Mean for a 401(k) Plan
ERISA establishes fiduciary, reporting, disclosure, and plan-administration requirements for private-sector retirement plans. The Internal Revenue Code imposes separate tax-qualification requirements, including many of the contribution, nondiscrimination, and correction rules discussed below. The DOL and IRS therefore oversee different, and sometimes overlapping parts of 401(k) compliance.
Fiduciaries can be personally liable for losses caused by a breach of duty. Many administrative failures also have an established correction path, although eligibility and required procedures depend on the facts.
ERISA generally preempts state laws that relate to an employee benefit plan, but employers may still face state payroll, tax, insurance, and employment-law requirements that affect plan administration.
In our practice at KLB Benefits Law Group, the failures we see most often did not start with the plan document. A pay code changed. An acquisition brought in a workforce nobody screened. An HR manager left, and the amendment folder left with her. The plan kept running, and the gap widened each year.
Plan Document Mistakes That Put Your 401(k) Out of Compliance
Mistake 1: Running the Plan From an Outdated Plan Document
Your plan document governs how the plan must operate, and changes in federal law may require timely amendments. When a required amendment is never executed, the written terms may no longer satisfy applicable qualification requirements.
Amendments often arrive from the recordkeeper in a routine packet, someone files them, and nobody confirms they were signed. Received is not adopted. Check your document file for signatures and dates.
Mistake 2: Ignoring the Eligibility Rules You Elected
Allowing an employee to participate earlier than the plan permits, or failing to enroll an employee who has satisfied the eligibility conditions, creates an operational failure because the plan is not being administered according to its written terms.
A manager enrolls a promising new hire as a courtesy before the waiting period ends. Part-time hours creep past the threshold, and nobody is watching the count. Reconcile payroll and employee census data against the plan’s age, service, entry-date, and exclusion provisions at least annually and whenever workforce classifications or payroll systems change.
Where ERISA and IRC Compliance for 401(k) Contributions Breaks Down
Contribution timing is a recurring compliance problem, in part because the controlling standard is not a single deadline that applies to every plan.
Mistake 3: Depositing Employee Contributions Late
The Labor Department’s plan asset regulation supplies a fact-specific timing standard rather than one fixed deadline for every plan.
Three timing rules are important:
- Employee contributions must be deposited as soon as they can reasonably be separated from the employer’s general assets.
- The seven-business-day safe harbor applies only to plans with fewer than 100 participants at the beginning of the plan year.
- The 15th business day of the following month is an outside limit, not a general deadline or safe harbor.
Lost earnings may be modest when the delay is short, but identifying every affected payroll period and participant can require substantial reconciliation work. On a $4,000 deferral three weeks late, for example, the lost earnings owed may be only a few dollars, while finding every affected payroll period can take considerably longer.
Delinquent participant contributions may constitute a prohibited transaction. The DOL’s Voluntary Fiduciary Correction Program provides a correction route, and its Self-Correction Component has been available since March 17, 2025, for qualifying transactions.
Among other conditions, late contributions generally must be remitted within 180 calendar days, lost earnings cannot exceed $1,000, and the employer must calculate lost earnings through the DOL calculator and submit an electronic notice. The program has no application fee.
The IRS also requires the payment of excise taxes and filing of Form 5330 as part of the correction of late deposit of deferrals or participant loan payments..
Mistake 4: Missing Participant Loan Repayments
A missed participant loan payment does not always trigger immediate taxation. A plan may provide a cure period extending as late as through the end of the calendar quarter following the quarter in which the payment was due. If the loan default is not corrected within the permitted period, the unpaid balance may become a deemed distribution reportable to the IRS as taxable.
Payroll changes, leaves of absence, and pay-code changes are common points of failure because scheduled repayments may stop without being identified. The employee previously received the loan proceeds, but a deemed distribution can create a current tax liability without providing the employee with new cash to pay it.
Review loan deductions whenever an employee changes payroll status, begins or returns from leave, or moves between payroll systems. Depending on the circumstances, correction may involve a lump-sum payment, re-amortization, or another method permitted under the IRS Employee Plans Compliance Resolution System (EPCRS).
Form 5500 Filing and Annual Testing Failures
Mistake 5: Missing the Form 5500 Deadline
The annual report is due seven months after your plan year ends, so July 31 for a calendar-year plan. A Form 5558 buys two and a half more months if filed by the original due date.
Miss it, and the penalties run daily. The IRS assesses up to $250 per day, capped at $150,000 per plan year. The Department of Labor’s penalty is $2,739 per day for 2026, unchanged from 2025, with no cap.
Under the Delinquent Filer Voluntary Compliance Program (DFVCP), the basic penalty is $10 per day. The penalty is generally capped at $750 per delinquent filing for a small plan and $2,000 per filing for a large plan, subject to separate per-plan caps. Eligibility generally depends on filing before the plan receives written notice from the DOL about the delinquency.
Mistake 6: Failing Annual Nondiscrimination Testing
Traditional non-safe-harbor 401(k) plans generally undergo annual ADP and ACP testing, while plans must also determine whether the top-heavy rules apply. The tests address different parts of the plan’s contribution and benefit structure.
Coverage Testing
Coverage testing examines whether a sufficient percentage of non-highly compensated employees (NHCEs) benefit under the plan compared with highly compensated employees. Under the ratio-percentage test, the percentage of NHCEs benefiting, divided by the percentage of HCEs benefiting, must generally be at least 70 percent. A plan that does not pass this test may still satisfy the more detailed average-benefit test.
ADP Testing
The actual deferral percentage test compares the elective deferral rates of highly compensated employees (HCEs) with those of non-highly compensated employees.
ACP Testing
The actual contribution percentage test generally examines matching and certain employee after-tax contributions.
Top-Heavy Testing
A plan is generally top-heavy when more than 60 percent of plan assets are allocated to key employees. A top-heavy plan may owe minimum contributions, generally up to 3% of compensation, to eligible non-key employees who remain employed on the last day of the plan year. Exceptions and special rules apply, including for certain safe-harbor and SIMPLE 401(k) plans.
For testing a 2026 plan year, the prior-year compensation threshold is $160,000. An individual who owned more than 5 percent of the business during the current or preceding year may also be an HCE regardless of compensation, and a plan may elect to apply the top-paid-group limitation.
Properly designed and operated safe-harbor plans can be exempt from ADP testing and, in some cases, ACP testing; they are not categorically exempt from every compliance test.
Fiduciary Oversight Failures
Mistake 7: Assuming Your Provider Owns the Responsibility
Fiduciary status under ERISA attaches to what you do, not to what your business card says. If you have discretionary authority over the plan or its assets, or if you choose and monitor the people who do, you may be a fiduciary. Fiduciary status can arise from the functions a person performs, even without a formal fiduciary title.
Common assumptions include:
- “The recordkeeper handles compliance.”
- “The third-party administrator approved it.”
- “We have fiduciary-liability insurance.”
Hiring a third-party administrator does not hand off the duty to select and monitor the provider, including its services and fees. Fiduciary exposure also does not necessarily stop at the company. Under ERISA § 409, a fiduciary who breaches these duties can be personally liable to make the plan whole.
Not knowing that you were acting as a fiduciary does not prevent fiduciary status from arising. A documented process should identify who serves on the committee (or who is responsible for plan oversight if there is no committee), when fees and services were last reviewed, and why decisions were made.
Documentation helps demonstrate a prudent process, but it is not a substitute for reviewing fees, services, investments, conflicts, participant communications, and provider performance. KLB Benefits Law Group advises employers on fiduciary responsibilities.
Which Correction Program Fixes Which 401(k) ERISA Compliance Mistake
Most 401(k) failures are correctable. Choosing the applicable correction program is a central part of ERISA compliance for 401(k) plans: IRS programs generally address tax-qualification failures, while DOL programs address specified fiduciary, prohibited-transaction, and reporting failures.
In the table, SCP refers to the IRS Self-Correction Program, VCP refers to the IRS Voluntary Correction Program, and EPCRS is the broader IRS correction system; VFCP and DFVCP are the DOL programs described above.
Failure | Primary agency | Possible correction route | Correction may involve |
Delinquent participant contributions | DOL and IRS | VFCP or qualifying Self-Correction Component | Deposit contributions, restore lost earnings, File Form 5330, pay excise taxes, provide required notice, and address prohibited-transaction reporting |
Operational eligibility failure | IRS | SCP or VCP, depending on eligibility and facts | Put affected participants in the position they would have occupied and conform plan operations to written terms |
Plan-document failure | IRS | SCP or VCP, depending on eligibility and facts | Adopt the required amendment and complete any additional correction required for affected participants or plan operations |
Certain plan-loan failures | IRS; potentially DOL | EPCRS and, where applicable, VFCP | Repayment, re-amortization, reporting, or another permitted correction |
Delinquent Form 5500 | DOL and IRS | DFVCP, if eligible | File the delinquent return and pay the reduced program penalty |
ADP, ACP, or top-heavy failure | IRS | EPCRS | Refunds, qualified nonelective contributions, minimum contributions, or another permitted correction |
Eligible failures may be corrected under the IRS Self-Correction Program without filing an application or paying a user fee. Other failures may require a submission under the Voluntary Correction Program, which carries an IRS user fee. DOL programs have their own filing, notice, and payment rules; notably, the VFCP Self-Correction Component does not charge an application fee.
The available program depends on the type of failure, when and how it was discovered, its duration and scope, whether established compliance procedures were in place, whether correction has begun, and whether the plan is already under examination.
Timing matters, but it is not the only factor. KLB Benefits Law Group helps employers choose the appropriate correction program.
How to Check Your 401(k) Plan for ERISA and Tax Compliance Problems This Month
A focused internal review can identify many common administrative discrepancies before a formal audit or government examination. Start with the executed plan document, amendments, payroll and census data, contribution records, loan records, testing results, and recent Form 5500 filings.
- Confirm every amendment is signed and dated, not just filed away.
- Compare contribution deposit dates across payroll periods and investigate delays from the plan’s normal processing schedule.
- Match the document’s eligibility terms against employee hire dates, service records, hours, classifications, and plan entry dates.
- Confirm the last three Form 5500 filings were accepted, not just submitted.
- Check loan withholding against every outstanding loan schedule.
- Find the written record of the last fee and service review. If the decision-making process is not documented, create a consistent review and recordkeeping procedure; the lack of documentation is a governance weakness, but it does not by itself prove that every underlying decision breached ERISA.
A problem identified internally may qualify for correction options that are unavailable after an examination begins. Retirement plan compliance reviews examine the governing documents, operational records, testing, and fiduciary process together. KLB Benefits Law Group regularly assists clients with internal audits and compliance reviews.
FAQs About 401(k) ERISA Compliance
What Happens if Your 401(k) Plan Fails an IRS or DOL Audit?
The result depends on the failure. The IRS or DOL may require corrective contributions, restored earnings, amended filings, participant notices, excise-tax reporting, penalties, sanctions, or changes to plan procedures. Plan disqualification is possible under the Internal Revenue Code but is generally not the starting point for an administrative failure that can be fully corrected.
Can 401(k) Compliance Errors Be Self-Corrected?
Some operational failures can be self-corrected under EPCRS if the plan satisfies the applicable requirements, including having established compliance procedures and beginning correction within a certain period. Other failures require an IRS VCP submission or a DOL correction program. Limited plan document failures may be eligible for IRS self-correction under current guidance.
Can a Business Owner Be Personally Liable for a 401(k) Mistake?
A fiduciary can be personally liable for plan losses caused by a breach of fiduciary duty and may be required to personally restore profits made through misuse of plan assets. Not every administrative error creates personal liability, however. The result depends on fiduciary status, the conduct involved, causation, available defenses, correction, indemnification, and applicable insurance exclusions.
How Long Should a 401(k) Plan Retain Its Records?
ERISA generally requires records supporting information reported on Form 5500 to be retained for at least six years after the filing date. Records needed to determine benefits should be kept for as long as they may remain relevant. Plan documents should be kept for the life of the plan plus at least six years following termination. These record-retention rules are not the same as the statutes of limitation governing fiduciary claims, and an investigation may require records from multiple plan years.
Talk to an ERISA and Tax Qualification Compliance Attorney About Your 401(k) Plan
If your payroll records, plan document, or recent filing history reveal a discrepancy, determine the type and scope of the failure before choosing a correction program. Early review can preserve correction options and reduce the risk that a manageable administrative issue becomes an enforcement matter.
KLB Benefits Law Group works only in ERISA and employee benefits and handles plan corrections through IRS and DOL programs. We advise employers nationwide based in Washington, D.C., and California. If your review identifies a possible compliance problem, learn how the firm handles retirement plan corrections.