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Employee Plans Learn, Educate, Self-Correct, and Enforce Project - Corrective Distributions as Reported on Schedules H or I, line 2(f)

Overview:

We examined 57 Form 5500 returns to determine if the returns that disclosed corrective distributions fully corrected the plan excesses, or indicated other errors.

This project involved Forms 5500 where the returns disclosed that corrective distributions were made for:

  • Excess deferrals under Code Section 402(g)(2)(A)(ii),
  • Excess contributions under Code Section 401(k)(8),
  • Excess aggregate contributions under Code Section 402(m)(6), or
  • Excess annual additions distributed per Reg. Section 1.415-6(b)(6)(iv)).

Project results:

The primary issue from this project was that even though a corrective ADP distribution was made and reported on Form 5500, full and proper correction was not always made. In 10% of the plans, the distribution was not made timely, completely or was improperly calculated.

Other issues included:

  • Failure to file Form 5330 and pay the excise tax due to late correction of an ADP excess contribution
  • Failure to follow plan terms
    • allowing employees to participate earlier than provided in the plan
    • not timely including employees when they had met the plan’s eligibility requirements
    • failure to allocate forfeitures as provided in the plan
    • failure to provide the proper elections for a qualified joint and survivor annuity distribution option provided in the plan

  • Inadequate fidelity bond
  • Annual additions to plan participants that exceeded the statutory dollar limits under IRC Section 415
  • Not correctly calculating service completed, resulting in improper vesting of distributions to terminated participants
  • Failure to timely amend plans to comply with current law and regulatory changes
  • Failure to timely deposit elective salary deferrals by the earliest date the amounts can reasonably be segregated from the employer's general assets
  • Failure to reconcile the deduction taken on the plan sponsor’s return with the contribution made timely to the plan.
  • Improper use of the ACP test in a collectively bargained plan, including corrective distributions. Collectively bargained plans are not subject to the ACP test, so the distributions were improper and violated the prohibitions on early distributions under 401(k) plans.

Avoiding the error:

Talk with your plan administrator or pension professional to determine if your plan is currently up to date with current law changes. Setting up operating procedures and appropriate internal controls for the plan is an important first step. If you need help, a benefits professional can help you set up a system that works for you and your retirement plan.

Ensure that you are aware of your plan’s terms and that your plan is timely amended for law and regulatory requirements. Failure to timely amend can cause the plan to become non-qualified.

Conduct a self-audit of your retirement plan. If you discover that your plan was not operating in accordance with its terms or with the laws, then consider correcting the errors under our Employee Plans Compliance Resolution System.  

Additional resources:

401(k) Fix-It Guide

Page Last Reviewed or Updated: 27-Sep-2013