Are You Satisfying Your 401(k) Matching Contribution Obligations?December 09, 2014
Be sure to take the necessary corrective actions to preserve your plan’s tax-favored status.
In its recently updated 401(k) Fix-It Guide, the IRS identified the failure to make employer matching contributions to all appropriate employees as one of the most common 401(k) plan mistakes. Could you fall victim to this problem, making your plan vulnerable to costly taxes, penalties and even loss of its tax-favored status?
Matching Contribution Trouble Areas
The problem can usually be traced to:
- Failing to properly count hours of service or identifying employees’ plan entry dates,
- Making incorrect contributions when you fail to follow the plan document terms, or
- Using the incorrect definition of compensation from the plan document for determining matching contributions (for example, failing to include deferrals).
The timing of matching contributions can also trigger matching issues (for example, calculating the contribution on a payroll period basis rather than on an annual basis at the end of the year).
Correcting the Mistake
You should base the correction of an incorrect matching contribution on the plan’s terms and other applicable information at the time of the mistake. You may be able to use the IRS’s Self-Correction Program (SCP) to remedy the situation without contacting the agency, paying a fee or assuming any application or reporting requirements.
If you aren’t eligible for the SCP, you can use the Voluntary Correction Program (VCP) — as long as the matching mistake wasn’t uncovered in an IRS audit. The VCP requires you to pay a submission fee ranging from $750 to $25,000, depending on the number of employees. You also must provide certain documentation, including Forms 8950 and 8951 and various other documents.
For more information on the SCP and VCP, as well as what you can do if the matching error is uncovered during an IRS audit, see 12 Tips for Avoiding Common 401(k) Plan Compliance Errors to help you avoid disqualification.
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Contact us for help identify your potential mistakes and how to take the necessary corrective actions to preserve your plan’s tax-favored status.