Top 10 401(k) Mistakes Found in the IRS Voluntary Compliance Program

401(k) plans offer significant tax benefits to both employers and participants. Employers can deduct plan contributions and expenses, while participants can defer the taxation of their contributions and earnings until they withdraw their account. To offer these benefits, a 401(k) must satisfy certain plan qualification requirements under ERISA. These requirements are enforced by the IRS.

Severe consequences can result when a 401(k) plan fails to meet one or more of the plan qualification requirements — including IRS penalties for the employer or plan disqualification. When a 401(k) plan is disqualified, it’s tax benefits are revoked — potentially retroactively. That can mean additional taxes, amended tax returns and penalties for underreporting income for both the plan sponsor and participants. Yikes!