IRS Flags Major 401(k) Mistakes That Could Quietly Erode Your Retirement Plan

When people hear about 401(k) mistakes, most assume the error is their fault, like not contributing enough to their account or picking the wrong funds. However, the IRS has a 401(k) Plan Fix It Guide that reveals many of the errors that employers and Human Resources departments make when managing their employees' accounts.

It's a good idea for workers to know about these financial mistakes because some of them can directly affect their retirement funds. Here are some examples of them, which show that employees should never assume that their retirement accounts are managed correctly. Rather, it's important to double-check contributions and employer matches to ensure everything is processed in a timely manner.

Not depositing employee paycheck deferrals

One common mistake employers can make is not depositing their employees' paycheck deferrals. Paycheck deferrals are when employees elect to deposit part of their paychecks into retirement plans. Sometimes employers exclude eligible employees. Sometimes, employers don't deposit the deferrals on time. Additionally, sometimes employers don't keep elective deferrals within the IRS contribution limits.

All of these mistakes are listed on the IRS Plan Fix It Guide, along with how to correct each one. For example, if an eligible employee wasn't given the option to make a deferral, the IRS recommends that the employer make a qualified contribution for that employee to make up for the mistake.

Not giving matching contributions to all eligible employees

Sometimes, employers fail to provide 401(k) plan access to all eligible employees. Additionally, some don't give matching contributions to all eligible employees. This is an unfortunate mistake that hurts employees because it means lost investment opportunities and lost time in the market.

The IRS recommends that employers correct this mistake by ensuring all eligible participants are in the same financial position they would have been in had they received matching contributions. Additionally, staying up to date with IRS guidelines, like when part-time employees are eligible for 401(k) access, can help avoid these errors.

Not processing employee hardship withdrawals correctly

There are new rules when it comes to hardship withdrawals. Some employers allow employees to withdraw $1,000 from their 401(k)s without penalty, so long as it's for an approved emergency expense. 

Employers make the mistake of failing to make these distributions correctly, and the IRS recommends that employers decide whether to retroactively allow hardship distributions or ask employees to return hardship distributions if they determine they're not allowed under the plan.

Ultimately, employees should check to see whether their employer allows hardship withdrawals prior to taking money out of their 401(k)s.

What to do if you think your employer has made a mistake

If you think your employer has made a mistake with your 401(k) plan, contact your HR department or your 401(k) plan manager. Make sure you provide documentation of the error, which likely includes your pay stubs and retirement plan statements. 

The IRS states that your employer can correct some mistakes without filing an IRS form. However, other, more significant mistakes may require extra steps, completing IRS forms, and documenting corrections.

How to verify your 401(k) policy

Every 401(k) policy has a Summary Plan Description (SPD). Administrators are required by law to provide this. It's a useful document that explains what the 401(k) plan is, how it operates, when employees are fully vested, and more. 

If your plan changes, your plan administrator must notify you. If you're not sure where to find your SPD, contact HR or log into your 401(k) portal.

Most of these mistakes are correctable

Even though many of these mistakes can be an administrative headache, the good news is that most of them are correctable. The IRS provides guidance on the steps employers need to take to fix these errors as well as avoid mistakes in the future.

Taking an active role in your retirement planning

Your employer is ultimately responsible for following 401(k) rules and regulations. However, taking an active role in your retirement planning means verifying your contributions and double-checking your employer match if you're getting one. 

Mistakes tend to happen when someone switches jobs, takes out a hardship withdrawal, or gets a 401(k) loan. So, if you're in one of those situations, take extra care to monitor your 401(k).

Bottom line

When you have a retirement plan, it's tempting to set it and forget it. Many people make automatic contributions with their paycheck and rarely revisit their account balances or asset allocations. 

However, the IRS's list of mistakes on its 401(k) Plan Fix It Guide shows that employers can make processing and managerial errors on their employees' accounts. Because of that, it's always a good idea to double-check pay stubs and ask HR if you have any questions.