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IRS Compliance Checklist: Keep Your Plan Running Smoothly and Legally
James Pellino

Some IRS compliance requirements for plan sponsors may be more familiar than others. Because knowledge of even the most basic rules tends to vary, the IRS offers a 401(k) plan checklist of the top compliance tasks. It is a good idea to test your plan against this checklist.

Before you start

Both you and your third-party administrator (TPA) should review the checklist. If your TPA handles compliance requirements on your behalf, use the list of questions to ensure that your TPA is on top of things.

Keep in mind that even if you — or your TPA — can answer all the questions affirmatively, it is no guarantee that your plan is fully compliant. The IRS cautions that the checklist is “only a guide to a more compliant plan.” 

Questions to ask

The IRS checklist asks the following questions:

  1. Did you update your plan document within the past few years? Laws governing retirement plans change regularly and you may be overdue in amending your plan document to keep your plan compliant.

    Related Read: Plan Documents: Be Proactive to Avoid Violations 
  2. Are the plan operations based on the plan document terms? A common problem found during audits is inconsistencies between the two. Minor changes in the way you administer your plan could cause problems if you do not amend your plan document accordingly.
  3. Does the plan use the definition of compensation for deferrals and allocations correctly? For example, bonus income is included as income for retirement plan purposes. Exceptions exist, but your plan document must be clear about the definitions and cannot apply definitions in a discriminatory manner.
  4. Has the plan made employer matching contributions to appropriate employees under the plan terms? Be sure to follow the plan terms when allocating employer matching contributions.
  5. Has the plan satisfied the 401(k) plan actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination tests? Annual nondiscrimination test compliance is an IRS priority. Keep all documentation of nondiscrimination test results. 

    Related Read: What You Need to Know About ADP/ACP Discrimination Testing
  6. Did the plan identify and give eligible employees the opportunity to make an elective deferral? Make sure that your payroll data is in sync with your plan census.
  7. Did the plan limit elective deferrals to Internal Revenue Code Section 402(g) limits for the calendar year? Section 402(g) limits the amount of retirement plan elective deferrals excludable from taxable income. When excess deferrals are not distributed, you could face penalties on top of tax liabilities.
  8. Have you timely deposited employee elective deferrals? The Department of Labor rules require employers to deposit deferrals to the trust as soon as the employer can; however, in no event can the deposit be later than the 15th business day of the following month. A seven-day safe harbor exists for plans with fewer than 100 participants.
  9. Do participant loans meet the plan document and Section 72(p) requirements? Failing to meet Section 72(p)’s prohibition on plan loans to “disqualified persons” can lead to the IRS taxing participants on prescribed loan amounts.
  10. Did you make hardship distributions properly? Be sure to follow the plan document as the IRS monitors compliance in this area closely.
  11. Did the plan make top-heavy contributions? Check the results of your ADP and ACP discrimination tests and ensure that, if required, extra contributions are made to non-key employees.
  12. Did you file Form 5500? This IRS requirement can be less onerous if you qualify to submit a Form 5500-SF. To qualify, your plan needs to cover fewer than 100 participants, hold no employer securities and be fully invested in certain securities.

Related Read: How To Prepare for a Plan Audit

Next steps

If you answered “no” to any of the questions, do not panic. As the IRS explains, “Many mistakes can be corrected easily, without penalty and notifying the IRS.” Not having to notify the IRS of your action to remedy a compliance issue does not diminish the importance of getting the job done.

For more information, contact Jim Pellino at [email protected] or 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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