• The employee dies, becomes disabled, or otherwise has a severance from employment.

• The plan is terminated and no other defined contribution plan is established or continued.

• The employee reaches the age of 59¹/₂ or suffers a financial hardship.

• Made to a beneficiary (or to the estate of the employee) on or after the death of the employee

• Made due to the employee having a qualifying disability

• Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59¹/₂, whichever is the longer period.)

• Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached the age of 55

• Made to an alternate payee under a qualified domestic relations order (QDRO)

• Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions)

• Timely made to reduce excess contributions under a 401(k) plan

• Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions)

• Timely made to reduce excess elective deferrals

• Made because of an IRS levy on the plan

• Made as a qualified reservist distribution

• The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan

• The plan year that includes the 10th anniversary of the year in which the participant began participating in the plan

• The plan year in which the participant terminates service with the employer

• Receive his or her entire interest (benefits) in the plan by the required beginning date (defined below), or

• Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period).

• The calendar year in which the participant reaches the age of 70¹/₂, or

• The calendar year in which the participant retires.

• Medical care expenses of the employee, the employee's spouse, dependents, or a primary beneficiary under the plan

• The purchase of a principal residence for the employee (excluding mortgage payments)

• Tuition, related educational fees, and room and board expenses, for up to the next 12 months of postsecondary education for the employee, the employee’s spouse, children, dependents, or a primary beneficiary under the plan

• Preventing eviction from or foreclosure of the mortgage on the employee’s principal residence

• Burial or funeral expenses for the employee’s deceased parent, spouse, children, dependents, or a primary beneficiary under the plan

• Repairing damage to the employee’s principal residence that could qualify for the casualty deduction on the employee's federal income tax return

• The employee has obtained all other currently available distributions and nontaxable loans under the plan and all other plans maintained by the employer; and

• The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.

• Whether the plan allows hardship distributions;

• The procedures the employee must follow to request a hardship distribution;

• The plan’s definition of a hardship; and

• Any limits on the amount and type of funds that can be distributed as a hardship from an employee’s accounts.

• Made from an IRA or attributable to elective deferrals under a 401(k) plan, 403(b) annuity, or certain similar arrangements;

• Made to an individual who was ordered or called to active military duty for a period in excess of 179 days or for an indefinite period; and

• Made during the period beginning on the date of such order or call to duty and ending at the close of the active duty period.

• The loan plus the participant's other outstanding loans from the plan may not exceed $50,000.

• The outstanding balance of loans may not exceed the greater of one-half of the participant's vested benefits.

• Unless the proceeds are used to purchase a principal residence, the loan must be paid back in 5 years or less.

• The loan must be paid back in equal payments made at least four times per year.

• The loan is evidenced by an enforceable agreement.

• Not be more than 125 percent of the ADP for nonhighly compensated employees (NHCE); or

• Not more than 2 percentage points greater than that of the NHCE and not be more than 200 percent of that of the NHCE.

• Provide guaranteed, 100 percent vested contributions of at least 3 percent of compensation for each non-HCE who is eligible to participate; or

• Provide a 100 percent vested matching contribution on all of each non-HCE's elective contributions up to 3 percent of compensation and on 50 percent of the elective contribution that is between 3 percent and 5 percent of compensation.

• The safe-harbor matching contribution or safe-harbor nonelective contribution formula used under the plan (including a description of the levels of safe-harbor matching contributions, if any, available under the plan)

• Any other contributions under the plan or matching contributions to another plan on account of elective contributions or employee contributions under the plan (including the potential for discretionary matching contributions) and the conditions under which such contributions are made

• The plan to which safe-harbor contributions will be made (if different than the plan containing the cash or deferred arrangement)

• The type and amount of compensation that may be deferred under the plan

• How to make cash or deferred elections, including any administrative requirements that apply to such elections

• The periods available under the plan for making cash or deferred elections

• Withdrawal and vesting provisions applicable to contributions under the plan

• Information that makes it easy to obtain additional information about the plan (including an additional copy of the summary plan description) such as telephone numbers, addresses, and, if applicable, electronic addresses of individuals or offices from whom employees can obtain such plan information

• All eligible employees must be provided a supplemental notice of the reduction or suspension when it occurs;

• The reduction or suspension of safe-harbor nonelective contributions can be effective no earlier than the later of 30 days after eligible employees are provided the supplemental notice or the date the amendment is adopted;

• Eligible employees must be given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) before the reduction or suspension of the safe-harbor nonelective contributions to change their contribution elections; and

• The plan must be amended to provide that the ADP test (and/or ACP test) will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current year testing method.

• The consequences of the amendment reducing or suspending employer contributions;

• The procedures for changing deferred or post-tax contribution elections; and

• The effective date of the plan amendment.

• Occurs because of the application of the securities laws

• Is regularly scheduled under the plan and that has been disclosed to affected plan participants and beneficiaries through an official plan document

• Occurs because of a qualified domestic relations order or because of a pending determination whether a domestic relations order filed (or reasonably anticipated to be filed) with the plan is a qualified order

• Occurs by reason of an act or a failure to act on the part of an individual participant or by reason of an action or claim by a party unrelated to the plan involving the account of an individual

• The reasons for the blackout period

• An identification of the rights otherwise available under the plan that will be temporarily suspended, limited, or restricted

• The length of the blackout period by reference to the expected beginning and ending dates or the expected beginning or ending calendar weeks, provided that during such weeks, information about whether the blackout period has begun or ended is readily available without charge, such as via a toll-free number or access to a specific website, to affected participants and beneficiaries

• A description of how to access the blackout period information

• A statement that the participant or beneficiary should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets credited to their accounts during the blackout period

• The name, address, and telephone number of the plan administrator or other contact responsible for answering questions about the blackout period

• Postponing the blackout period would result in a violation of ERISA's exclusive benefit and prudence requirements, and a fiduciary of the plan reasonably so determines in writing.

• The inability to provide the advance notice of a blackout is the result of events that were unforeseeable or circumstances beyond the reasonable control of the plan administrator, and a fiduciary of the plan reasonably so determines in writing.

• The blackout period applies solely in connection with certain participants or beneficiaries becoming, or ceasing to be, participants or beneficiaries of the plan as a result of a business reorganization.

• Are counted for ADP/ACP testing;

• Are eligible for catch-up contributions;

• Can be used to determine available loan amounts; and

• Must be immediately vested and be distributed only on occurrence of permitted distributable events.

• On or after the participant attains the age of 59¹/₂;

• After the participant's death; or

• After the participant's disability.

• Roth 401(k) contributions are subject to the general 401(k) limit, while Roth IRA contribution limits are based on the IRA limit.

• Eligibility for a Roth IRA phases out at certain income levels. There is no income limit for Roth 401(k) eligibility.

• The age of 70¹/₂ minimum distribution requirements do not apply during a Roth IRA owner's life, but they do apply during Roth 401(k) owners' lives.

• While traditional IRAs can be converted into Roth IRAs, no such option is available for 401(k) accounts.

• Elective deferrals are limited to contributions under a cash or deferred election as defined under IRC Sec. 401(k).

• Previously permitted eligibility restrictions are eliminated and employees must be universally eligible to make elective contributions. This change does not apply to governmental entities (such as public school districts).

• Contributions to plans not covered by ERISA must be transferred to providers within a reasonable time for proper plan administration (for example, transferring elective deferrals within 15 business days following the month in which these amounts would have been paid to the participant). These plans may terminate and distribute assets with full rollover ability, as well as recognize the occurrence of an employment severance where an employee no longer works for an employer eligible to maintain a 403(b).

• Participation of employees is completely voluntary;

• All rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of the employee or beneficiary;

• The involvement of the employer is limited to certain optional specified activities; and

• The employer receive no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer's duties pursuant to the salary reduction agreements.

• Assess the reasonableness of total compensation, both direct and indirect, received by the CSP, its affiliates, and/or subcontractors;

• Identify potential conflicts of interest; and

• Satisfy reporting and disclosure requirements under Title I of ERISA.

• ERISA fiduciary service providers to a covered plan or to a “plan asset” vehicle in which such a plan invests;

• Investment advisers registered under federal or state law;

• Recordkeepers or brokers who make designated investment alternatives available to the covered plan (e.g., a “platform provider”); and

• Providers of accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third-party administration, or valuation services to the covered plan who also receive "indirect compensation" in connection with such services.

• That 401(k) plan participants are given, or have access to, the information they need to make informed decisions, including information about fees and expenses;

• That the delivery of investment-related information is in a format that enables workers to meaningfully compare the investment options under their pension plans;

• That plan fiduciaries use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist among and within plans so that investments can be objectively compared; and

• A new level of fee and expense transparency.

• General plan information consisting of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions, a current list of the plan’s investment options, and a description of any “brokerage windows” or similar arrangement that enables the selection of additional investments not designated by the plan.

• Administrative expenses information, including an explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.

• Individual expenses information, including an explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

• Performance data. Participants must be provided specific information about historical investment performance with 1-, 5-, and 10-year returns provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.

• Benchmark information. For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the performance data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.

• Fee and expense information. For investment options that do not have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be disclosed. For investment options that have a fixed rate of return, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be disclosed.

• Internet website address. Investment-related information includes an Internet website address that is sufficiently specific to provide participants and beneficiaries access to specific additional information about the investment options for those who want more or more current information.

• Glossary. Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options or an Internet website address that is sufficiently specific to provide access to such a glossary.

• Voluntary provision of an e-mail address. Participants and beneficiaries entitled to receive information must voluntarily provide the employer, plan sponsor, or plan administrator (or its designee) with an e-mail address for the purpose of receiving fee disclosures. The e-mail address must be provided in response to a request accompanied by an initial notice, as described below. If the provision of an e-mail address is a condition of employment or participation in the plan, the e-mail address is not to be treated as being provided voluntarily. However, if a participant is required to provide an e-mail address electronically in order to access a secure, continuous-access website that includes the required disclosure, the provision of the e-mail address is considered voluntary if an initial notice is properly provided.

• Initial notice. The initial notice must be clear and conspicuous, provided at the same time and in the same medium as the request for the e-mail address, and contain a statement that providing an e-mail address for the receipt of the fee disclosures is entirely voluntary and that as a result of providing the e-mail address, the required fee disclosures will be made electronically plus additional information listed below.

• Annual notice. Commencing with the year beginning after the year that the participant or beneficiary voluntarily provided his or her e-mail address, and annually thereafter, the plan administrator must furnish an annual notice to each participant or beneficiary. For this purpose, “year” means a calendar year, plan year, or any other 12-month period selected by the plan administrator. The annual notice must be furnished on paper. Alternatively, it may be furnished electronically by sending it to the e-mail address on file for the participant or beneficiary if there is evidence that the participant or beneficiary interacted electronically with the plan after the date the annual notice for the preceding year was furnished (or in the case of the first annual notice, after the date the initial notice was furnished). Examples of electronic interaction include, but are not limited to, the participant or beneficiary updating, resubmitting, or confirming his or her e-mail address to the plan; the participant or beneficiary sending an electronic message to the plan; logging onto a secure, continuous-access website housing plan information; or the receipt and opening of an electronic message sent by the plan to the participant or beneficiary.

• Delivery. The plan administrator takes appropriate and necessary measures reasonably calculated to ensure that the electronic delivery system results in actual receipt of transmitted information (e.g., using return receipt or notice of undelivered electronic mail features, conducting periodic reviews or surveys to confirm receipt of transmitted information).

• Confidentiality. The plan administrator takes appropriate and necessary measures reasonably calculated to ensure that the electronic delivery system protects the confidentiality of personal information.

• Calculated to be understood. Notices furnished to participants and beneficiaries must be written in a manner calculated to be understood by the average plan participant.

• The TGIN contains the information required in the regular initial notice;

• The TGIN is furnished not earlier than 90 days nor later than 30 days before the date the initial disclosure of fee information is provided to the transition group; and

• The TGIN is furnished on paper or electronically by sending it to an e-mail address on file if there is evidence of electronic interaction with the plan during the 12-month period preceding the date the TGIN is furnished.

• Identification or a brief description of the information that will be furnished electronically and how it can be accessed by participants and beneficiaries;

• A statement that the participant or beneficiary has the right to request and obtain, free of charge, a paper copy of any of the information provided electronically and an explanation of how to exercise that right;

• A statement that the participant or beneficiary has the right, at any time, to opt out of receiving the information electronically and an explanation of how to exercise that right; and

• An explanation of the procedure for updating the participant’s or beneficiary’s e-mail address.

• Provides an opportunity for a participant or beneficiary to exercise control over assets in his or her individual account; and

• Provides a participant or beneficiary an opportunity to choose, from a broad range of investment alternatives, how some or all of the assets in his or her account are invested.

• The plan makes the default investments in accordance with guidelines to be issued by DOL; and

• Affected participants receive an annual notice explaining their right to direct investments and have a reasonable opportunity to do so.

• The participant had the opportunity to redirect investments, but failed to do so;

• The characteristics of the default investments are similar to those they replace; and

• The participant was provided with a written notice 30 to 60 days in advance, describing the fund changes and the default investment.

• Apply generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time;

• Use relevant information about the participant or beneficiary;

• Use prescribed objective criteria to provide asset allocation portfolios composed of investment options under the plan;

• Operate in a manner that is not biased in favor of any investment options offered by the fiduciary adviser or related person; and

• Take into account all the investment options under the plan in specifying how a participant's or beneficiary's account should be invested without inappropriate weighting of any investment option.

• The experience and qualifications of the investment advisor, including the advisor’s registration in accordance with applicable federal and/or state securities law;

• The willingness of the advisor to assume fiduciary status and responsibility under ERISA for the advice provided to participants; and

• The extent to which the advice will be based on generally accepted investment theories.

• Three percent of compensation for the first year the deemed election applies to the participant;

• Four percent during the second year;

• Five percent during the third year; and

• Six percent during the fourth year and thereafter.

• It matches 100 percent of the first 1 percent deferred, plus 50 percent of the next 5 percent deferred, for a maximum match of 3¹/₂ percent on behalf of each nonhighly compensated employee; and

• The rate of match for elective deferrals for highly compensated employees is not greater than the rate of match for nonhighly compensated employees.

• Matching contributions are not provided for elective deferrals in excess of 6 percent of compensation;

• The rate of matching contribution does not increase as the rate of an employee's elective deferrals increases; and

• The rate of matching contribution for any rate of elective deferral of a highly compensated employee is no greater than the rate of matching contribution for the same rate of deferral of a nonhighly compensated employee.

• The employee's right to elect not to have elective contributions made or to elect to have contributions made in a different amount; and

• How contributions made under the automatic enrollment arrangement will be invested in the absence of any investment election by the employee.

• That the participant has a right to elect not to have elective contributions made on his or her behalf (or to elect to have such contributions made at a different percentage);

• That such an election must be made within a reasonable period of time after receipt of the notice and before the first contribution is made; and

• How contributions made under the arrangement will be invested in the absence of any investment election by the participant.

• A participant may elect to have the plan sponsor make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash such as a 401(k) plan;

• A participant is treated as having elected to have the plan sponsor make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or elects to have contributions made at a different percentage); and

• Contributions are invested in accordance with the default investment provisions of ERISA Sec. 404(c)(5) in accordance with guidelines to be issued by the DOL, and affected participants receive an annual notice explaining their right to direct investments and have a reasonable opportunity to do so.

• That the participant has a right to elect not to have elective contributions made on his or her behalf (or to elect to have such contributions made at a different percentage);

• That such an election must be made within a reasonable period of time after receipt of the notice and before the first contribution is made; and

• How contributions made under the arrangement will be invested in the absence of any investment election by the participant.

• Assets must be invested in a “qualified default investment alternative” (QDIA) as defined in the regulation.

• Participants and beneficiaries must have been given an opportunity to direct their investments but have not done so.

• An initial notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter.

• Material, such as investment prospectuses, provided to the plan for the QDIA must be furnished to participants and beneficiaries.

• Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly.

• Fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct his or her own investments are limited.

• The plan must offer a “broad range of investment alternatives” as defined in DOL's ERISA Sec. 404(c) regulations.

• A product with a mix of investments that takes into account the individual’s age or retirement date (such as a life-cycle or targeted-retirement-date fund)

• An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (such as a professionally managed account)

• A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (such as a balanced fund)

• A capital preservation product such as a money market fund for use during the first 120 days of participation only (This option is for plan sponsors wishing to simplify administration if workers opt out of or reduce their automatic enrollment contribution during the first 90 days after their first contribution.)

• At least 30 days before the date of plan eligibility or at least 30 days before the first investment in a QDIA on behalf of a participant or beneficiary; or

• On or before the date of plan eligibility, provided the participant has the opportunity to make a permissible withdrawal without adverse financial consequences.

• A description of the circumstances under which assets in the individual account of a participant or beneficiary may be invested on behalf of the participant or beneficiary in a QDIA and, if applicable, an explanation of the when elective contributions will be made on behalf of a participant, the percentage of such contributions, and the right of the participant to elect not to have such contributions made on the participant's behalf (or to elect to have such contributions made at a different percentage);

• An explanation of the right of participants and beneficiaries to direct the investment of assets in their individual accounts;

• A description of the QDIA, including a description of the investment objectives, risk, and return characteristics (if applicable), and fees and expenses associated with the investment alternative;

• A description of the right of the participants and beneficiaries for whom assets are invested in a QDIA to direct the investment of those assets to any other investment alternative under the plan, including a description of any restrictions, fees, or expenses that might be charged for the transfer; and

• An explanation of where the participants and beneficiaries can obtain investment information concerning the other investment alternatives available under the plan.

1. Late deposit of 401(k) deferrals. DOL regulations require that employers deposit salary deferrals as of the earliest date on which such amounts can reasonably be segregated from the employer's general assets. In most cases, the salary deferral amounts can be segregated within 1 or 2 days before the date the employee’s paycheck is issued. In many cases, amounts can be segregated on the same day. Other rules provide that in no event may salary deferrals be deposited later than the fifteenth business day of the month following the month in which such amounts would otherwise have been payable to the participant in cash. The IRS says that many employers have misinterpreted this rule, believing that it provides them with a “safe harbor” that allows them to delay deposit until the fifteenth business day of the following month, regardless of whether amounts can be segregated on an earlier date. This is not a safe harbor. Rather, it sets a maximum deadline for depositing contributions.

Prevention. Employers need to implement procedures to ensure that salary deferrals are timely deposited.

Penalty. The failure to deposit salary deferrals on a timely basis constitutes a prohibited transaction subject to excise tax under IRC Sec. 4975. In addition to the payment of tax, the employer must correct the transaction. Correction requires the restoration of lost income resulting from the late deposit of amounts to the trust. Delaying the deposit of salary deferrals until after 12 months following the end of the plan year could result in plan disqualification.

2. Improper 401(k) accelerated deductions. Employers are improperly claiming a deduction on their current year federal income tax return for 401(k) deferrals made on account of and paid during the subsequent tax year. Rev. Rul. 2002-46 describes this acceleration of 401(k) deductions as a tax avoidance scheme, which constitutes a “listed transaction” for tax shelter purposes and provides guidance on correcting the problem. IRS Announcement 2002-2 provides information on disclosure requirements.

Employers are also improperly accelerating income tax deductions by contributing amounts in the current year (usually on the last day of the taxable year) that are attributable to subsequent year salary deferrals. There is an exception for bona fide administration considerations only if the contributions are not paid early with a principal purpose of accelerating deductions.

Penalty. If the transaction is not corrected on time or disclosed properly, the employer may be liable for penalties (i.e., accuracy-related or fraud penalties) in addition to any income taxes due.

3. Failure to use correct compensation. Plan administrators are using the incorrect definition of "compensation" when calculating the ADP and ACP tests, computing the salary deferral and employer-matching contributions, and verifying that contribution limitations are satisfied. Usually, these problems occur when the employer and/or plan administrator are not aware that the plan document contains different definitions of compensation for different plan purposes. Plan administrators are also failing to limit compensation for contribution and nondiscrimination purposes as required under IRC Sec. 401(a)(17).

Prevention. Employers and plan administrators need to be familiar with the terms of the plan document to ensure that they use the proper definition of compensation for nondiscrimination testing, deferral and contribution calculations, and limitation purposes. It is important to know whether (i) types of compensation are excluded for specific plan purposes, (ii) compensation is limited for specific plan purposes, and/or (iii) compensation is determined using different computation periods (i.e., plan year vs. calendar year).

Penalty. The failure to (i) follow the terms of the plan document, (ii) limit compensation under Section 401(a)(17), and/or (iii) satisfy the ADP and/or ACP tests could result in plan disqualification.

4. Improper exclusion of eligible employees for purposes of ADP and/or ACP testing. When conducting the ADP and/or ACP tests, plan administrators are improperly excluding eligible employees. For ADP purposes, eligible employees include all employees who are directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. This means that an employee who can defer at any time during a plan year must be included in the testing, including part-time employees who satisfy the eligibility requirements.

When conducting the ADP test, plan administrators are improperly excluding eligible part-time employees, nondeferring employees who begin or terminate participation during a plan year, and/or those employees who simply choose not to defer.

When conducting the ACP test, plan administrators are improperly excluding employees who are eligible under the plan to make employee contributions or to receive an allocation of matching contributions but choose not to make employee contributions or do not receive any matching contributions.

Another problem occurs when the population of eligible employees is different for ADP and ACP testing purposes and the plan administrator does not differentiate when conducting the tests. Example: A plan provides that an employee is eligible to make deferrals for any portion of the plan year even if he or she terminates during the year with fewer than 500 hours of service. That employee must be included in the ADP test. The plan also provides that the same employee must be employed on the last day of the plan year in order to receive an employer-matching contribution. If the employee is not employed on the last day of the plan year, the same employee would not be included in the ACP test. Employers are ultimately responsible for ensuring that their plans operate in accordance with the rules set forth underIRC Sec. 401(k) and IRC Sec. 401(m).

Prevention. Employers and/or plan administrators should implement procedures to ensure that administrators have sufficient employment and payroll records to identify all eligible employees and that these employees are properly included for purposes of ADP and/or ACP testing.

Penalty. The failure to follow the terms of the plan document or satisfy the ADP and/or ACP test could result in plan disqualification.

5. Misclassification of highly and nonhighly compensated employees for ADP and/or ACP testing. Plan administrators are misclassifying highly and nonhighly compensated employees for purposes of ADP and ACP testing. Misclassification often occurs when the administrator fails to review prior year compensation, consider the attribution rules related to ownership when identifying 5 percent owners, and/or comply with the plan document in instances where it provides for the top-paid election. Problems result when there is a communication gap between the employer and plan administrator about what the plan document provides and what documentation is needed to ensure compliance.

Prevention. Employers should work with their plan administrators to ensure that (i) both parties are familiar with the terms of the plan, and (ii) plan administrators are provided with all of the information needed to make a proper determination of each employee’s status.

Penalty. The failure to follow the terms of the plan document or satisfy the ADP and/or ACP test could result in plan disqualification.

6 Failure to correct or timely correct ADP and/or ACP failures. Plan administrators are failing to take timely, proper corrective action after finding that their plans fail the ADP and/or ACP test. In many cases, the plan administrator does not receive the information needed to conduct the tests in time to make needed correction.

Prevention. Employers and/or plan administrators need to implement procedures to ensure that excess contributions and/or excess aggregate contributions are corrected in a timely manner.

Penalty. In general, if correction is not completed within 2¹/₂ months following the end of the plan year to which the excess deferrals relate, the employer will be liable for a 10 percent tax under IRC Sec. 4979. (Note: The 10 percent tax will not apply if the employer uses the current year testing method and corrective qualified nonelective contributions or qualified matching contributions are made within the 12-month period following the testing year.)

The failure to (i) follow the terms of the plan document (relating to correction) and (ii) satisfy the ADP and/or ACP tests could result in plan disqualification. Disqualification of the plan will apply not only for the plan year for which the excess contributions were made but will also include all subsequent plan years during which the excess contributions remain in the trust.

7. Incorrect employer-matching contributions. Employers are failing to contribute the employer-matching contribution provided for under the terms of the plan document. In many cases, the problem is caused by the employer’s and/or plan administrator’s failure to properly count hours of service or identify plan entry dates for employees. Incorrect contributions are also made when the employer and/or plan administrator fails to follow the terms of the plan document.

A common problem is the failure to use the definition of "compensation" described in the plan document. For example, the sponsor or administrator may not add deferrals back into compensation as required under the plan document when calculating the matching contribution.

Another problem has to do with the timing of matching contributions. The terms of a plan usually state that employer-matching contributions will be a percentage of participant deferrals, up to a specified level. Plans generally describe these matching contributions in terms of annual amounts and percentages. If the plan administrator calculates the matching contribution on a payroll basis, rather than on an annual basis, at the end of the year the sum of these amounts may not comply with the terms of the plan.

Example: A plan provides that the employer will make matching contributions based on employee deferrals for the year and that the match will equal 50 percent of the amount deferred by the participant for the year. The maximum deferral considered for the matching contribution is 4 percent of compensation. A participant deferring at least 4 percent of compensation should have a matching contribution allocation of 2 percent of compensation. Participants are allowed to change their deferral levels at stated intervals during the year. For administrative reasons, the match is computed and paid each pay period. If a participant elects a 2 percent rate of deferral for the first half of the year, the match per pay period would be 1 percent. If the participant elects a 6 percent rate of deferral for the second half of the year, the match per pay period would be 2 percent (only deferrals up to 4 percent of compensation are considered). The result would be deferrals for the year of 4 percent of compensation and matching contributions of 1.5 percent of compensation. This result comes from the administrative decision to compute the match periodically during the year rather than at the end of the year when total deferrals would be known. If the plan provisions state that matching contribution will be determined each payroll period, there is no operational problem. Otherwise, an additional contribution would be required at year-end to bring the participant's match up to 2 percent.

Prevention. Employers and plan administrators need to be familiar with the terms of their plan and implement procedures to ensure that the plan operates in accordance with the plan document. Employers should work with plan administrators to ensure that the administrators have sufficient employment and payroll information to calculate the employer-matching contribution described under the terms of the plan document.

Penalty. The failure to follow the terms of the plan document could result in plan disqualification.

8. Deferrals in excess of IRC Sec. 402(g) limits. Employers are improperly allowing employees to defer compensation amounts in excess of the IRC Sec. 402(g) dollar limitations. Common causes include the failure to monitor (i) limitations for each employee, (ii) limitations based on the calendar year, and (iii) employees who transfer between divisions/plans of the same employer. In some cases the employer is not aware that these limits apply to the participant rather than the plan. The employer establishes multiple plans and allows the participant to defer the maximum amount under each plan. In other cases, the plan year is not the calendar year and deferrals are made based on plan year compensation. When testing for compliance, the administrator bases the limitation on the plan-year deferrals rather than deferrals made during the calendar year. Problems also occur when the employer and/or plan administrator fail to monitor employees who transfer between divisions and plans of the same employer and allow participants to defer the maximum amount under each plan.

Prevention. Employers need to ensure that they have a system in place to monitor salary deferrals for those employees who participate in more than one plan of the employer. Employers should work with plan administrators to ensure that the administrators have sufficient payroll information to verify that the deferral limitations of IRC Sec. 402(g) were satisfied.

Penalty. IRC Sec. 401(a)(30) provides that if excess deferrals are made to a plan and are not distributed along with related earnings before April 15 of the subsequent year, the plan will be disqualified.

9. Failure to provide the safe-harbor plan notice on time. Plan sponsors are failing to timely provide the required notice for safe-harbor plans. In order to satisfy the ADP safe-harbor requirements, plan sponsors are required to provide participants with timely notice of the safe-harbor provisions. The timing requirement requires that the plan sponsor must provide notice within a reasonable period before each year. This requirement is deemed to be satisfied if the notice is given to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year (with special rules for employees who become eligible after such ninetieth day).

A plan that uses the 401(k) safe-harbor matching contribution method will not fail to satisfy Sec. 401(k) (or Sec. 401(m)) for a plan year merely because the plan is amended during the plan year to reduce or eliminate matching contributions, provided that a supplemental notice is given to all eligible employees explaining the consequences of the amendment and informing them of the effective date of the reduction or elimination of matching contributions so that they have a reasonable opportunity to change their cash or deferred elections and, if applicable, their employee contribution elections.

Prevention. Employers and plan administrators need to understand the requirements for safe-harbor plans and ensure that procedures are in place so that those requirements are satisfied in the plan document and plan operation.

Penalty. The failure to follow the terms of the plan document could result in plan disqualification.

10. Failure to meet hardship distribution requirements. In 401(k) plans that offer participant loans and hardship distributions, plan administrators are allowing hardship distributions to participants who elect not to take out a plan loan to satisfy the hardship. This fails to satisfy the hardship distribution rules that provide that a hardship distribution may not be made to the extent that the need may be satisfied from other resources that are reasonably available to the employee.

Another hardship distribution problem involves employers that fail to suspend salary deferrals for participants who receive hardship distributions from their accounts. The failure to suspend salary deferrals may occur as a result of a lack of communication between the employer and plan administrator regarding participants who have received a hardship distribution. The failure may also occur because the employer is not aware of the rules for hardship distributions or familiar with the plan document provision that requires the suspension.

Prevention. Employers need to be familiar with the hardship provisions included in their plan documents and implement procedures to ensure that the provisions are followed in operation. Employers need to ensure that the plan administrators and payroll offices share information regarding hardship distributions that are made from the plan.

Penalty. The failure to follow the terms of the plan document could result in plan disqualification.

• Don’t panic. The most important step toward finding an answer to a problem is to identify the problem and recognize that something needs to be done. Once the problem is identified (hopefully as early as possible), it can be dealt with before it becomes an even bigger problem.

• Avoid artificial deadlines for action. It is always dangerous for administrators to move too quickly; sometimes the most obvious or the best answer to a problem can be overlooked simply because one is in a hurry to do something.

• Find out all the facts. Do not assume any facts, or try to “mold” the facts to fit a given situation. One way of fact-finding is to conduct a self-audit from time to time.

• Develop solutions. Review the legal requirements with the particular fact situation in mind, and formulate a number of different solutions. Sometimes, only one solution is possible. In other cases, there may be several possible solutions, but they all seem to be pretty bad. Remember, though, that sometimes the best answer is the least bad answer.

• Implement the solution. This may seem obvious, but is often difficult because of impediments from affected employees or organizational bureaucracy. At this point, an administrator may wish to obtain a legal opinion or other guidance from outside sources to help implement the correct approach.

• Participant complaints;

• Problems with a recent health and welfare plan audit;

• Referrals by other agencies;

• DOL’s own initiatives;

• Data from Form 5500 submittals; and

• News coverage, such as reports of plant shutdowns or other disruptions.

• Lack of quality in the independent audits required to be performed annually; and

• Large defined benefit plans’ inability to locate and pay some “lost participants.”

• Self-Correction Program (SCP) for insignificant failures, allowing plan sponsors with established policies and procedures to self-correct without submission to the IRS;

• Voluntary Correction with Service Approval (VCP), allowing plan sponsors to pay a compliance fee and file with the IRS for approval; and

• Correction on Audit (Audit CAP), for plan failures identified by the IRS upon examination.