IRS Tips on Correcting Plan Mistakes

The IRS has compiled a list of common plan mistakes it encounters during examinations and in its voluntary correction programs. It may be helpful for plan sponsors to be familiar with these common mistakes and IRS tips for self-correction to avoid making similar mistakes. On the IRS website,, are links to easy-to-understand examples of the mistakes, tips for correcting the mistake, and suggested best practices for making sure the same mistake isn’t made again. The IRS’s “Fixing Common Plan Mistakes” webpage includes tips to fix:

  • Making ADP and ACP testing failures
  • Incorrectly administering automatic enrollment provisions
  • Using an incorrect definition of compensation for plan purposes
  • Failing to withhold and deposit employees’ elective deferrals
  • Allowing excess contributions
  • Excluding eligible employees from the plan
  • Failing to distribute required minimum distributions timely
  • Making loans and hardship distributions that do not follow plan provisions
  • Failing to provide a safe harbor 401(k) plan notice

Two of the items on the IRS’s list of common mistakes have compliance deadlines coming up.

Required Minimum Distributions (RMDs)

April 1, 2015, is generally the deadline to distribute the first RMD for participants who turned age 70½ in 2014. This is an important deadline to meet because minimum distribution rules are plan qualification requirements. Failure to follow the minimum payment rules as written in the plan document can lead to the loss of the plan’s tax-qualified status. If participants or beneficiaries do not receive their minimum distribution on time, they are subject to a 50% additional tax on the underpayment.

To avoid making the compliance mistake of not paying out RMDs timely, the IRS suggests that plan sponsors carefully monitor the age of all participants who are approaching age 70 to make sure that annual distributions begin timely.

Excess Deferrals

April 15, 2015, is the last date to distribute excess elective deferrals made in 2014 without incurring additional tax consequences. The deferral limit in 2014 was $17,500. Participants who were age 50 or older in 2014 may have been able to make catch-up contributions of up to $5,500 above this limit, for total deferrals of $23,000.

To correct the excess deferral and avoid double taxation, the excess amount plus earnings must be refunded to the participant by the tax-filing deadline for the year in which the deferrals were made (for example, by April 15, 2015, for excess deferrals made during calendar-year 2014). Participants whose elective deferrals exceeded the limit in 2014 must report the excess amount as income on their 2014 income tax returns. They must include any earnings attributable to the excess on their tax returns for 2015, the year the excess and earnings are withdrawn.

Common causes for this type of excess include failing to monitor:

  • Contribution limits for each participant
  • Contribution limits based on the calendar year versus the plan year
  • Employees who transfer between divisions and plans of the same employer

To make sure this mistake does not happen, the IRS suggests that plan sponsors have a system in place to monitor salary deferrals for those employees who participate in more than one plan of the employer. Plan sponsors should also work with third party administrators and recordkeepers to ensure they have sufficient payroll information to verify that contributions were within the deferral limits

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This information is provided as a reference tool for your convenience and may not represent a complete list of all events that apply to your plan.

For Plan Sponsor Use Only – Not for Use with Participants or the General Public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

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