Mid-Year Retirement Plan Compliance Review: Avoiding Common 401(k) Errors

8/13/2026

The reason to review a plan in July rather than in February is economic.

Most retirement plan failures are correctable — and what the correction costs depends on how quickly you find it. Several correction routes are available for operational failures found and fixed promptly, at modest cost and without involving anyone. The same failure found later, or found by an examiner, is a different and more expensive conversation.

Which makes the self-review a paid-for exercise rather than a compliance chore. The finding you make in July is worth substantially more than the identical finding in the following spring.

Start With the Plan Document

Because almost every operational failure is a mismatch between the document and what actually happened.

Read the current document and the adoption agreement, including amendments — not the summary plan description, and not last year's understanding of it. Then confirm:

Is the document current for required amendments and within its restatement cycle?

Does the document say what everyone thinks it says? The provisions most often misremembered are the definition of compensation, the eligibility and entry dates, the vesting schedule, the match formula, and whether the employer contribution is discretionary.

Then compare each of those to what payroll and the recordkeeper are actually doing. That comparison is the entire review, and the sections below are the places it most often fails.

The Error That Causes the Most Failures

The definition of compensation.

The plan document defines the compensation on which deferrals and employer contributions are computed. Payroll computes them on whatever was configured, once, possibly by someone no longer at the company, possibly before the document was amended.

The mismatches recur in the same places: bonuses, commissions, overtime, taxable fringe benefits, severance, final pay, and amounts paid after termination. If the document includes bonuses and payroll excludes them, every affected participant has been under-deferred and under-matched — and the correction runs across all of them for every affected year.

The test is mechanical and worth doing annually: take the document's definition, apply it to a sample of participants' actual pay records, and compare to what was withheld and contributed. Differences point straight at the payroll configuration.

This is the single most productive procedure in a mid-year review, and it is the one clients have never run.

Deferral Deposits: A Prohibited Transaction, Not a Late Payment

The most common finding in small plan examinations, and clients consistently underestimate its character.

Employee deferrals withheld from pay must be transmitted to the plan as soon as they can reasonably be segregated from the employer's general assets, with a safe harbor available to small plans. A late deposit is not an administrative slip — it is a prohibited transaction requiring correction with lost earnings, and it must be reported.

Two points that matter operationally:

"As soon as reasonably possible" is measured against what the employer has actually demonstrated it can do, so an employer that usually deposits quickly and occasionally does not has set its own standard.

The cause is almost always process, not intent — a manual step, a person on holiday, a payroll run handled differently. Which means the fix is a process fix: same-day or next-day transmission built into the payroll close, with a monitored exception report. Our post on payroll reconciliation covers the control.

Verify the current timing rules and correction mechanics before advising; both have specifics that matter.

Eligibility and Entry

Three failure patterns, in order of frequency:

Missed entry dates. An employee satisfies the service requirement and is not enrolled or offered the opportunity, usually because nobody was tracking the date. The correction for a missed opportunity to defer has its own formula, and it costs the employer real money.

Part-time employees. The rules requiring eligibility for employees with sustained part-time service have changed and continue to require attention — this is the eligibility area most likely to be wrong in a plan that has not been reviewed recently, because it requires tracking hours for people the employer never considered plan-eligible. Confirm the current requirements.

Rehires and transfers. Prior service usually counts, and rehire rules are frequently ignored — as are employees moving between related entities. Our post on plan selection covers the controlled group point that makes this worse: employees of a related business may be plan-eligible without anyone realizing it.

Automatic Enrollment and Elections

Where a plan uses automatic enrollment, the failures are specific: employees not enrolled at the default rate, escalation not applied, the notice not delivered on time or at all, and elections received but not implemented.

The last one is worth naming because it is so ordinary: an employee submits a deferral election and payroll never changes. It is a missed deferral opportunity with a prescribed correction, and it is found only by comparing election records to payroll deductions — which almost nobody does.

Note that prompt correction of certain automatic enrollment failures may qualify for reduced correction. Verify the current conditions, because they reward speed and are therefore worth knowing in July.

Limits, Testing, and the Projection

Check the limits mid-year rather than discovering an excess after year end: deferral limits including catch-up eligibility, the annual additions limit, and the compensation cap. Participants with more than one employer during the year, and highly paid participants front-loading deferrals, are where excesses appear.

Then run the nondiscrimination tests on a projected basis. This is the most valuable forward-looking step available.

A projected ADP or ACP test using year-to-date data tells you in the summer whether the plan is heading for a failure — at which point the options are still open: encourage additional non-highly-compensated participation, plan for a qualified non-elective contribution, or arrange refunds in an orderly way. Discovering the same failure after year end leaves fewer choices and a deadline. Our post on compliance testing covers the mechanics of the tests themselves.

Top-heavy status should be projected on the same basis, since it carries a minimum contribution consequence that is far better anticipated than discovered.

Loans, Hardships, and Forfeitures

Loans. Check terms against the document and the statutory limits, confirm the amortization is being applied, and identify missed payments — which lead to deemed distributions with tax consequences for the participant and a correction problem for the plan. Loans are a small dollar item that produces a disproportionate share of findings.

Hardship distributions. Confirm the documentation the plan requires actually exists, and that the amounts and permitted reasons match the document. Files with no substantiation are a recurring finding.

Forfeitures. Unused forfeiture accounts accumulating over years are a common failure, because the document generally specifies how and when forfeitures must be used. A forfeiture balance carried forward for several years is a document violation sitting in plain sight on the trust statement.

The Items Nobody Checks

Four that come up in examinations and appear in no client's mental checklist.

The ERISA fidelity bond. A bonding requirement applies to persons handling plan funds, and it is separate from fiduciary liability insurance — which clients routinely conflate. Many plans are unbonded or under-bonded, and it is a question asked early in an examination and answered easily if you have checked.

Form 5500 and the audit determination. Whether the plan requires an independent audit depends on participant counts under a prescribed method, and the method has changed — so a plan that did or did not require an audit last year may be different this year. Confirm the current method. The 401(k) training and certification program covers the administration side.

Required notices. Safe harbor notices, automatic enrollment notices, fee disclosures, and blackout notices each have content and timing requirements, and a missed notice is a finding independent of whether anyone was harmed.

Distributions and required minimum distributions, particularly for terminated participants and beneficiaries — see the required minimum distributions training and certification program.

Correction: Why Timing Is the Whole Point

Returning to the opening argument with the practical consequence.

Self-correction of many operational failures is available on favourable terms — and generally not available once the plan is under examination.

Which produces the strategic conclusion for a client weighing whether to bother with a review: finding it yourself has direct economic value. The same failure costs one amount when self-corrected promptly, more through a formal voluntary route, and considerably more when raised by an examiner — where sanctions are negotiated and the correction is not on your timetable.

Verify the current programs, their conditions, and their time limits before advising on any specific correction. The framework has been revised and the details determine the route.

A Working Sequence for July

Read the current plan document and amendments, and confirm it is within its restatement cycle.
Test the compensation definition against payroll for a sample of participants — the highest-yield procedure.
Test deferral deposit timing across the year to date, and fix the process rather than the instance.
Reconcile eligibility: entry dates, part-time service, rehires, and related-entity employees.
Compare election records to payroll deductions, including automatic enrollment defaults and escalation.
Check limits and identify participants at risk of an excess.
Project the nondiscrimination tests and top-heavy status, and decide the response while options exist.
Review loans, hardship documentation, and the forfeiture account.
Confirm the fidelity bond, the 5500 and audit determination, and the notice schedule.
Document what you tested and what you found, and take corrections to counsel or the plan's advisers with the correction route identified.
Fix the processes, not just the arrears — and calendar the review annually.

Program-level coverage runs through the 401(k) training and certification program, the version with the procedures manual, the retirement plan administration catalog, and the retirement tax guide.

Where Plans Fail

Reviewing the summary plan description instead of the plan document
A document outside its restatement cycle or missing required amendments
Payroll's compensation definition not matching the document's — the commonest operational failure
Bonuses, commissions, overtime, fringe, or severance treated inconsistently with the document
Late deferral deposits treated as an administrative slip rather than a prohibited transaction
Fixing a late deposit instance without fixing the payroll process that caused it
Missed entry dates because nobody tracks them
Part-time employee eligibility unreviewed under the changed rules
Rehire and related-entity service ignored
Deferral elections received and never implemented in payroll
Automatic enrollment defaults or escalation not applied, or notices not delivered
Limits checked after year end, when an excess is harder to resolve
No projected ADP/ACP or top-heavy test, so a failure arrives with no options left
Loan payments missed, producing deemed distributions
Hardship files with no substantiation
Forfeiture accounts accumulating contrary to the document
No fidelity bond, or fiduciary insurance mistaken for one
The audit determination made under a superseded participant-count method
Required notices missed on content or timing
Waiting for an examination, after which favourable self-correction is generally unavailable

The summary for a CPA with plan-sponsor clients: run the compensation-definition test against payroll and the deferral deposit timing review, because those two procedures find most of what is wrong — then project the nondiscrimination tests while the year is still open enough to act on them. Do it in July rather than February, because self-correction on favourable terms is generally unavailable once someone else finds the problem first.

Frequently Asked Questions

Why review a plan mid-year rather than at year end?

Because correction cost depends on when the failure is found. Several routes allow prompt self-correction of operational failures at modest cost, and those routes are generally unavailable once the plan is under examination — so finding a problem in July has direct economic value over finding the identical problem later, or having an examiner find it.

What causes the most operational failures?

A mismatch between the plan document's definition of compensation and what payroll actually used. Bonuses, commissions, overtime, taxable fringe benefits, severance, and post-termination pay are the recurring culprits, and a mismatch means every affected participant was under-deferred and under-matched for every affected year. Testing the document's definition against actual pay records is the highest-yield procedure in a review.

Is a late deferral deposit just an administrative error?

No. Deferrals withheld from pay must be transmitted as soon as they can reasonably be segregated from the employer's general assets, and a late deposit is a prohibited transaction requiring correction with lost earnings, and reporting. The cause is almost always a process gap rather than intent, so the fix belongs in the payroll close with a monitored exception report.

What eligibility issues are most often wrong?

Missed entry dates for employees who satisfied the service requirement, part-time employee eligibility under rules that have changed and that require tracking hours for people the employer never considered eligible, and rehires or transfers whose prior service counts. Employees of a related business under the controlled group rules may also be eligible without anyone realizing it.

Why run the nondiscrimination tests on a projected basis?

Because a projection using year-to-date data reveals a likely failure while the options are still open — encouraging additional participation, planning a qualified non-elective contribution, or arranging orderly refunds. The same failure discovered after year end leaves fewer choices and a deadline. Top-heavy status is worth projecting on the same basis.

Which items do sponsors never check?

The ERISA fidelity bond, which is separate from fiduciary liability insurance and which clients routinely conflate; the Form 5500 audit determination, since the participant-count method has changed and a plan's status may differ from last year; required notice content and timing, where a miss is a finding regardless of harm; and the forfeiture account, where a balance carried forward for years is a document violation visible on the trust statement.