Avoiding Common 401(k) Compliance Mistakes

In the world of retirement planning, few things are as important—or as complex—as maintaining 401(k) plan compliance. Despite the best intentions, many plan sponsors fall into common traps that can trigger hefty penalties, audits, or legal action. At AS Wealth Management Planning, we guide employers through the ever-changing regulatory environment to help them avoid these 401(k) compliance mistakes before they become costly.

Whether you’re a small business owner managing your first plan or a seasoned HR professional overseeing a large retirement portfolio, understanding and addressing these pitfalls is crucial.

1. Missing Required Nondiscrimination Testing

One of the most frequent 401(k) compliance mistakes is missing or incorrectly conducting required nondiscrimination testing. The IRS mandates that plans pass Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and top-heavy tests to ensure highly compensated employees aren’t unfairly favored.

How to Avoid It:

• Partner with third-party administrators (TPAs) or firms like AS Wealth Management Planning to manage your annual testing schedule.

• Gather accurate census data and ensure timely processing.

• Set calendar reminders to ensure tests are completed within the first few months of the new plan year.

2. Late Deposit of Employee Contributions

Regulations require employee contributions to be deposited into their 401(k) accounts “as soon as administratively feasible,” but no later than the 15th business day of the following month. In reality, the DOL expects deposits within 7 business days for small plans.

How to Avoid It:

• Set up automated payroll deductions and remittance systems.

• Conduct internal audits to confirm deposits are processed promptly.

• AS Wealth Management Planning offers audit support and plan monitoring to ensure timely compliance.

3. Improperly Excluding Eligible Employees

Another key compliance issue arises when eligible employees are mistakenly excluded from the plan. This is especially common in cases of high turnover or part-time employees.

How to Avoid It:

• Review your plan document regularly to confirm eligibility rules.

• Train HR staff on compliance requirements and maintain accurate employee records.

• AS Wealth Management Planning offers consulting on employee classification and eligibility review.

4. Exceeding Contribution Limits

Each year, the IRS sets maximum contribution limits. For 2025, the elective deferral limit is $23,000 (with an additional $7,500 for those 50 or older). Mistaken over-contributions can lead to tax penalties for both the employer and employee.

How to Avoid It:

• Coordinate with payroll and HR systems to monitor contribution levels.

• Conduct periodic audits of participant contributions.

• Let AS Wealth Management Planning help with automated tracking tools and proactive alerts.

5. Incorrect Plan Document or Outdated Amendments

Your plan document is your compliance blueprint. If it’s outdated or inconsistent with current regulations like SECURE 2.0, it could invalidate your plan’s tax-qualified status.

How to Avoid It:

• Review and update plan documents annually, especially after federal regulatory changes.

• Ensure amendments are executed by the IRS-mandated deadlines.

• Work with AS Wealth Management Planning to manage document restatements and compliance amendments.

6. Failing to File Form 5500 Accurately and On Time

Form 5500 is a critical reporting requirement that discloses plan assets, operations, and compliance status. Late or inaccurate filings can lead to substantial penalties—up to $2,500 per day.

How to Avoid It:

• Mark your calendar: The filing deadline is seven months after the plan year ends (generally July 31).

• Ensure all supporting data is accurate and complete.

• AS Wealth Management Planning assists clients with timely and accurate 5500 preparation and audit facilitation.

7. Lack of Fee Transparency

The Department of Labor (DOL) requires that plan sponsors disclose all plan fees to participants. Hidden or poorly explained fees can spark lawsuits and damage trust.

How to Avoid It:

• Conduct regular fee benchmarking and review all service provider contracts.

• Deliver transparent fee disclosures to all participants annually.

• Let AS Wealth Management Planning provide benchmarking tools and help negotiate cost-effective provider agreements.

8. Ignoring Fiduciary Responsibilities

If you’re a plan sponsor or decision-maker, you have a fiduciary duty under ERISA to act in the best interests of plan participants. Ignoring this duty or failing to document decisions can lead to liability claims.

How to Avoid It:

• Develop a documented fiduciary process, including regular investment reviews.

• Maintain meeting minutes and provide employee education.

• Use AS Wealth Management Planning as a co-fiduciary advisor to reduce your liability exposure and stay compliant.

9. Lack of Employee Communication

Many plan sponsors fail to communicate changes, investment options, or match opportunities clearly and frequently. This affects both compliance and plan participation.

How to Avoid It:

• Distribute Summary Plan Descriptions (SPDs) and annual notices on time.

• Offer webinars or workshops to keep employees informed.

• AS Wealth Management Planning provides custom education and communication materials to boost engagement.

10. Not Reviewing Service Providers

Many businesses “set and forget” their plan’s record keepers, advisors, and TPAs. But failing to regularly review providers can lead to unnecessary fees or compliance oversights.

How to Avoid It:

• Perform regular provider evaluations and document findings.

• Request updated service agreements and assess performance annually.

• Work with AS Wealth Management Planning to conduct objective, vendor-neutral plan reviews.

Conclusion

Avoiding 401(k) compliance mistakes is not just about avoiding penalties—it’s about protecting your business, your employees, and their future. The complexities of regulatory requirements make it nearly impossible for employers to go it alone.

At AS Wealth Management Planning, we specialize in proactive retirement plan compliance, employee education, and fiduciary support. Whether you’re just launching your plan or optimizing an existing one, we’re here to help ensure your retirement program remains secure, efficient, and compliant.

Contact AS Wealth Management Planning today to schedule your compliance check-up and keep your 401(k) plan on the right track.