According to recent IRS examinations, small 401(k) plans—plans with less than $250,000 in assets) often suffer from two compliance problems:
(1) Failure to timely amend the plan to comply with changes in the governing law.
(2) Failure to have an adequate fidelity bond. (Generally, fidelity bonds should be between 10% of the trust assets and $500,000.)
Additionally 1/3 of the small plans examined by the IRS failed to properly run plan discrimination tests and/or failed to timely deposit elective deferrals. These errors can be costly if discovered by the IRS. Furthermore, the failure to timely deposit elective deferrals constitutes a prohibited transaction between the plan and the plan sponsor. Any of these errors could result in disqualification of the plan resulting in reversal of the tax benefits associated with the plan.
These failures will likely become the focus of future IRS plan audits. Small plans can identify and detect these errors by conducting periodic compliance audits. Plans that are out of compliance may remedy these problems through the IRS and Department of Labor voluntary correction programs. If your 401(k) plan is out of compliance, contact your McGrath North attorney or a member of our Employee Benefits practice group to begin the correction process as soon as possible.